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If you have a family-owned business, and you want to keep it in the family, then you need the next generation to become involved with the business as soon possible. Of course, the next generation might not be interested in taking over in which case if you want to sell or retire then you need to look at alternative ways to exit the business such as a management buyer out, or a third-party sale.
But if you are lucky enough to have the next generation wanting to work in the business then it is sensible to get them involved as early as possible. In this way you can guide their development in the business, for example, by giving them experience in all the different areas of the business, from operations, to finance, production, to customer service and finance. Once the next generation have established themselves as being suitable to take over the business then it is sensible to have a succession plan in place.
A well-designed succession plan is not a single transaction, it is an evolving legal framework that reflects the chosen exit route, preserves value, protects key relationships, integrates family and commercial interests, anticipates life events, reduces dispute risk, and maintains flexibility for future generations.
Ideally, the legal aspects of succession planning should begin well before the intended exit, whether it is retirement or just stepping back from the business.
It becomes particularly important when:
The next generation joins the business
Shares are first issued to family members
The business reaches significant value
External investment is considered
The founder begins reducing day-to-day involvement
Personal circumstances change
We regularly act for family-owned business so understand the different dynamics that come with this type of business. We are able to structure transactions so that exiting family members are able to receive either a lump sum or ongoing payments while allowing the next generation to control and manage the business
The succession plan is intended to answer the following question: what is the intended future ownership and control structure of the business and how do we get there?
In practical terms, that means deciding:
Who will ultimately control the company?
Who will benefit economically from it?
Do the exiting family members need an ongoing income from the business?
Does ownership remain wholly within the family?
Do senior management or a third party acquire some of the business?
Do the older generations keep shares in the business?
How is ownership and control transferred? It may be unlikely that a family member will buy the business at market rates and therefore if the exiting persons needs an ongoing income then how is this structured?
Is a full or partial sale the best outcome?
How will continuity be maintained during transition?
How can future disputes between stakeholders be minimised?
What are the legal and tax effects of the succession plan?
Succession planning is not simply about stepping aside. It is about deliberately shaping the next phase of ownership that fits with the requirements of each of the parties.
Most business transitions fall into one, or a combination, of the following routes.
Family Succession – where ownership and/or management passes to the next generation. This may involve gradual gifting of shares and/or retaining voting control while transferring economic value and/or introducing the next generation into leadership over time and/or placing shares into trust structures. In our experience family members won’t pay market rates, or even anything, for the transfer of the business to them. This can present a problem if the exiting members require money.
Management Buy-Out (MBO) – if you have someone in senior management who is capable and would like to take over some form of ownership then consider them as well as succession to a family member. This route can provide liquidity to the exiting member, preserve operational continuity, and retain experience within the business. However, MBO’s can involve complications such as funding arrangements, security, deferred consideration and ongoing risk exposure.
Employee Ownership (including EOT Structures) – together with a transfer to a family member, some shares can be transferred to employee ownership, often via an Employee Ownership Trust. This requires careful trust drafting and long-term oversight planning.
Trade Sale or Private Equity Exit - together with a transfer to a family member, some shares can be sold to a third party. This can deliver a clean financial exit for the exiting members but may end family control as third-party buyers usually requires control or preferential dividend rights.
We are seeing that increasingly owners combine different options to achieve their end goal, for example, combining exit routes such that a family member retains some ownership in the business but combines it with:
Selling a minority stake to management;
Retaining a shareholding alongside a third-party investor, or a third-party buyer;
Releasing control over time;
Using freezer and growth shares.
These models can preserve flexibility but are legally more complex.
Once you have your succession plan in place, then you need to look at the checks and balances that need to be put in place to ensure that the structure can last over time, including any mechanisms that can be used if there is a dispute, deadlock, or a relationship breaks down. Family-owned businesses can potentially attract an increase in the likelihood of a dispute due to the additional family related issues that can be bought into the business.
Common triggers include:
Sibling rivalry
Tension between working and non-working shareholders
Disagreements over dividend policy
Deadlock at board level
Valuation disputes when someone exits
Conflict between family owners and non-family executives
Legal documentation reduces these risks by clearly setting out:
Who controls voting rights
Who receives income
Which decisions require enhanced consent
How deadlock is resolved
How shares are valued on exit
What happens on death, incapacity, or divorce
Many family businesses are built not only by the family, but by long-standing, non-family senior staff. Handled properly, involving loyal non-family managers can strengthen continuity and protects value.
These individuals may:
Hold critical operational knowledge
Maintain key commercial relationships
Provide continuity across generations
Act as stabilising influences within the organisation
Succession planning that ignores their role can create risk. If experienced managers feel uncertain about their future authority, financial participation, or job security, they may leave at precisely the moment stability is most needed.
Legal planning will often include deciding whether key staff should acquire equity and/or a Board role. Minority equity arrangements, growth shares, leaver provisions, and clearly defined board roles all require careful drafting. Poorly structured arrangements are a common source of dispute.
Succession planning is not simply about naming a replacement. It is about ensuring critical roles can be filled without destabilising the business.
Understand the issues caused on the exit of a family member - if a senior member of the family is looking to retire or exit the business then what issues does this cause? Do they have key relationships with customers and suppliers, or are they instrumental decision makers gate keeping information?
Identify Critical Roles - essential to operational stability and long-term success, typically senior leadership, technical specialists, and key relationship holders. Define clearly the skills, experience, and decision-making authority required for each role. This creates a clear benchmark for preparing successors.
Plan the Transition - implement a phased handover with defined timelines and responsibilities. Communicate appropriately with key stakeholders to maintain confidence and minimise disruption. Contingency plans should also be in place in case of unexpected change.
Review Regularly - succession plans should be reviewed periodically to reflect changes in strategy, personnel, or market conditions. A structured, regularly updated plan helps preserve stability and reduce leadership risk.
Legal work often needed for business succession plans
Updating Articles of Association - to ensure the company’s constitutional rules properly reflect how shares can be transferred, how decisions are made, and what happens on key events such as death, retirement or dispute.
Introducing or revising shareholder agreements - to regulate the relationship between owners, clarify expectations, and set out agreed processes for issues such as decision-making, dividend policy, and exit.
Defining voting rights and dividend entitlements - to distinguish between control and economic benefit where appropriate, particularly where some family members are active in the business and others are not.
Creating compulsory transfer provisions on death or incapacity - to prevent shares passing automatically to unintended beneficiaries and ensure continuity by requiring an orderly buy-out.
Embedding structured exit mechanisms - to provide a clear and pre-agreed route for shareholders to leave, including valuation methods, and funding arrangements, in order to reduce the risk of conflict or uncertainty.
Share transfer restrictions - if family succession is the preferred route, structures may include transfer restrictions in constitutional documents, pre-emption rights favouring family members, buy-back mechanisms, clearly defined valuation formulas, and family trust arrangements.
Wills, trusts and estate planning - succession needs to align with personal estate planning. Private client lawyers will ensure wills align with shareholder agreements, trust structures, support governance objectives, and Business Property Relief is preserved where available. Lasting Powers of Attorney cover is generally important and also divorce risks being properly considered.
The future is uncertain. Therefore you need to put in place legal documents that anticipate something unexpectedly happening such as death, or incapacity.
Without a proper structure to deal with the unexpected you run the risk of:
Decision-making being paralysed
Banks may refuse instructions
Court applications may be required
Control may pass unintentionally
Proactive legal planning protects the business at its most vulnerable moments and includes putting place Powers of Attorney and cross-option arrangements.
We acted on the sale of a family-owned business to a third-party. In this case we were faced with the additional complexities that the relationship between some family members had broken down. In particular, there was tension between the retired family members and those running the business.
Acting on the sale of 80% of the shares in a company to a third party investor, leaving 20% that will be gifted in due course to the grandson of the founder, who will continue in the business and who will be trained to run the business over the next few years.
Succession planning is most effective when started early and approached strategically.
If you would like to discuss your succession objectives, whether you are considering a transition to another member of the family, a management buy-out, or a wider exit, our corporate and private client teams often work together to design to benefit and protect your business and your family’s long-term goals.
Please contact us to arrange a confidential discussion.
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