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Succession planning can be a complex and emotional process. Only an estimated 12% of family-owned businesses make it to the third generation and, with it potentially being the culmination of a life’s work, it is important that prior planning is undertaken to set out the succession process, optimise it and ensure that all parties involved are aligned.
This article examines the options available to company owners with regards succession and how they can prepare for it. It also highlights the impact of the recent UK budget, which is pushing this issue to the top of the agenda for many business leaders across Northern Ireland.
Succession planning
The long-term survival of a business and the preservation of the wealth that has been built over one or more generations will likely depend on establishing and maintaining a comprehensive and strategic succession plan.
Typically, the age and stage of the owner will dictate the timetable, but it is essential that the leadership and management of a business are included in this discussion to avoid fragmentation. For there to be a successful exit, the business needs to continue to operate effectively and prosper under the new ownership.
Succession can take on a number of forms and each should be thought through and considered in light of the particular circumstances of the business and the owner. A number of possible routes are:
Passing to the next generation
If an owner wishes for the business to remain in the family and intends to pass it on, it is essential that the next generation is brought into the business and wants to be a part of its future. Without this commitment, the future of the business is likely to be unpredictable and short lived.
For many family-owned businesses in Northern Ireland, which may be in their second generation, passing the business on through inheritance may have always seemed like the natural, logical step. Under the recent Labour Autumn Budget however significant changes have been made to business asset disposal relief (BADR) which could place substantial financial burdens on the beneficiaries of any such business.
Under the previous regime, there was a 100% tax relief on any business asset transferred via inheritance. This allowed businesses to remain within a family with no inheritance tax being applied. Under the recent changes however, from 6 April 2025 this 100% relief will only be available on the first £1m of the value of the business. Beyond that all business assets will attract a 20% tax. The £1m threshold will be quickly reached as it includes all lands, property, fixtures and assets in the business. This change will impact a large swathe of businesses across Northern Ireland, including those which are characterised as SMEs. It will represent a significant increase in tax bills for beneficiaries set to receive the family business in addition to any other inheritance tax charges which may arise on the deceased’s estate. In effect, it may be too expensive to pass the business on via this method. As stated, this is a significant change in the legislation and will have a strong impact on succession planning. We would strongly advise all business owners to review their current plans considering these changes.
External sale
If the owner is looking beyond their own family with regards succession, this may take the form of a sale to an external competitor, private equity buyer or alternatively to the current management of the business.The choice will depend on current market environment and the position of the business. In all cases the treatment of senior management will need to be carefully considered and managed. If they are not appropriately included in the succession plan and recognised and ncentivised for their contribution, they will likely not remain in employment. If a business is to continue to prosper it needs consistent and effective management.
Employee Ownership Trust
An increasingly popular option is to establish an EOT.The founders would sell their shares (at least a controlling share) in the business to a trust set up for the benefit of the employees. The carefully selected trust board would take over providing strategic direction to the company. An EOT can allow for an exit when there is no clear or desirable third party or next generation buyer and it should incentivise employees to grow the business for their own benefit. The guiding principle for a successful EOT is having a strong senior team that is willing to take the business forward.
The EOT structure has significant benefits for the seller who would enjoy 100% relief on capital gains tax (CGT) on the shares sold to the EOT. Where they retain some shares in the business, they would also continue to participate in future growth. Many founders also take comfort from the knowledge that ownership of the business remains within their local community.
The tax benefit is in stark contrast to tax bills that owners will experience in other disposals as, under the Autumn Budget, CGT has been increased to 24% for higher rates taxpayers going forward. There are however strict legislative requirements that need to be adhered to for the benefits of an EOT to be fully realised.
Company reorganisation in preparation
Regardless of the succession plan selected, one of the most effective ways to plan for and facilitate effective succession is through a pre-emptive internal business assessment. This may include steps such as a reorganisation which can help streamline operations, improve tax efficiency and financial flexibility. This can involve incorporating holding companies, striking off dormant subsidiaries or changing the equity structure currently in place.
In seeking to implement an optimal group structure for your business, it will be necessary to undertake an internal due diligence exercise. The benefits of this are vast and will allow a stock take of capital to be made, systems to be improved, policies to be updated and assets protected. The exercise will allow you to identify and tidy up any potential business issues and allow the business to function in the most efficient manner going forward. A reorganisation may also carry certain tax advantages. We recommend that the legal and tax advisors are consulted to ensure all opportunities on this point are fully explored and the best option selected.
A reorganisation, as described above, has the potential to be a strategic trigger to the acceleration of a business’s development and an effective way to streamline whilst protecting against obvious risk. Ultimately, this should make the business more attractive to future owners or investors.
Conclusion
Transferring ownership of an owner managed business will undoubtedly be a demanding and apprehensive time for the founder. It may mark the culmination of their professional career and may result in control being relinquished or diminished in the business they poured years of effort into. It is therefore essential that prior professional planning and thought is given to this process to minimise stress and costs and maximise the output received. As stated above, this is even more critical in light of the recent BADR changes being introduced, as it has the potential to wipe away those years of effort if the process is not correctly managed.
We, as professional advisors, can help facilitate difficult conversations and ensure that there is a strong legal framework underpinning the process and common understanding throughout the business and family. We are experienced at guiding businesses of all sizes and sectors through succession planning ensuring that the process is highly tailored to each set of circumstances thus maximising benefit and ensuring a smooth process for all involved.
For more information, please contact Mark Thompson, Partner, Matthew Nesbitt, Solicitor, or a member of our Corporate and M&A team.
Dater published: 24 June 2025
