Less than half of family-run firms in the UK have a succession plan, potentially leaving the business at risk if a key person becomes seriously ill or dies.
Financial services company Legal & General surveyed 800 small businesses for its State of the Nation's SMEs report, revealing that many are ill-prepared for a critical event or the transfer of ownership from one generation to the next.
Just 42% of family businesses have any form of long-term plan in place. In fact, under a third (30%) of the entrepreneurs who took part in the research expect their business to survive into the second generation and only 10% into the third.
Looking at the impact of a critical event on different types of businesses across the UK, the research found that family firms in particular (48%) rated the death or critical illness of the business owner as the highest risk to their operations.
A quarter of family businesses would have to stop operating immediately following the loss of a key person and 57% would cease trading within a year.
Because of the lack of long-term planning, the research suggests there is a sense of uncertainty within family-run companies about how they would manage the death of an owner. One in five said they would expect shareholders to buy shares from the deceased's estate, although it was not clear where the funds would come from, while 17% expected to sell their shares to a third party but were unsure of the price they would achieve, and a fifth said they would have to close the business down completely.
"If we want to see Britain's family businesses remain a staple part of the economy for generations to come, it is vital that the owners have clear plans in place regarding their succession, particularly when it comes to managing the impact of their death or critical illness," commented Richard Kateley, head of intermediary development at Legal & General.
Small business accountancy firm Accounts & Legal argues that succession planning isn't something that can be sorted out in an afternoon.
"Our opinion is if you wake up one morning and decide you want to retire, you should have started planning for it three years before to avoid potentially reducing the value you receive for what may be your biggest asset," the company explains.
A three-year plan can demonstrate the business’ independent performance, giving the company a history of not relying on the owner to succeed.
Have you got the expertise to guide small business owners through the complicated business of succession planning? Or are you an entrepreneur thinking about what will happen to your business when you're no longer around? Get in touch with Outbound Solutions today! We help connect business owners with financial advisers who can provide specialist advice.