Vet practices and succession planning – which approach is right for you?

It can be difficult for business owners to find time to take stock, think about the future of the business and to carry out some form of succession planning – this is equally true for owners of veterinary practices.

Succession planning is the process of deciding what will happen to your business in the future. A proactive approach may involve introducing new people to the business over time to take over, or perhaps selling to a business partner or other buyer.

There is also a reactive element with regards to succession planning -looking at what may happen on the death or incapacity of a business partner. However, it is possible to a certain extent to plan for these situations.

What should you consider when thinking about your succession? We have set out a brief explanation of the types of things to consider depending on whether you have a company or partnership structure in place.

Active approach

Company

When introducing new people to the business, you can do this over a period of time by transferring shares to them in instalments. In such situations, it would be sensible to have a shareholders’ agreement in place which will manage the relationship between the shareholders and will deal with things such as:

• A shareholders’ shares if they cease to be employed or be a director of the company
• Transferring shares to a third party
• Forcing minority shareholders to sell their shares if a third party offers to purchase all the shares in the company
• How decisions are made
• Shareholder death or incapacity

Partnership or Limited Liability Partnership (LLP)

Partnerships are flexible arrangements which can be ideal for creating a simple succession plan without triggering tax issues.

They allow for the adjustment of equity interests to reflect things such as length of service or hours spent working in the business. A system for the induction of new partners, supporting and rewarding them as they progress their career, to retirement provisions where longer-standing partners reduce their time commitment to the business, can be easily achieved and adjusted over time.

A comprehensive partnership agreement which covers everything from exit management to rights and obligations on retirement can be implemented to support the business.

While partnerships provide huge benefits in terms of flexibility, partners will become personally liable for the debts and liabilities of the partnership. However, an LLP is an alternative to a partnership. More akin to a company, the LLP exists independently of its members, affording them limited liability, whilst preserving the same flexibility for an effective succession plan.

Reactive Approach

Company

This involves dealing with unplanned situations that may take place, such as the death of a fellow shareholder. In the absence of a shareholders’ agreement or bespoke drafted articles, the shares may be inherited by whoever is named in the shareholder’s will or another under the intestacy law.

This is not an ideal situation, as whoever inherits those shares may not have any real knowledge about running a business. It is therefore sensible to take a pro-active approach and to ensure you have the right documents in place setting out the parties’ intentions.

Partnership/LLP

If you have a partnership, a structured succession plan is vital. All partners should ensure that they have an up-to-date deed in place to document their interests in the business, their rights  and, critically, to prevent an automatic dissolution of the partnership upon leaving. Without a partnership deed partners will be vulnerable to unexpected events.

An LLP will not dissolve on the exit of a member – but without a written agreement, the law has a statutory system of governance which allows all members to share in profits and capital equally, along with equal voting rights, and no power to expel a member for any reason. This is rarely appropriate for a practice and fails to provide any succession planning benefits.

Finally, it always sensible to take tax advice as part of your succession planning so as to ensure that you do this in a tax-efficient way.