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Succession planning: the next chapter

Simon Warne, Partner, Private Clients
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For many family businesses, there comes a time when it becomes necessary to consider the next chapter. Whether it is planning for succession or exit, the importance of being prepared should not be underestimated.

When planning for succession, it is not always as simple as gifting shares to the next generation. While this can achieve the main objective – the passing on of a business to the next generation of owners – it is not without complications. Failing to have a thorough plan in place can lead to unpleasant financial surprises, such as an unexpected tax bill, and could result in unnecessary pressure or disagreements among family members. Leaving the distribution of shares to be addressed upon the death of business owner can potentially lead to shares to be tied up while complex estates are sorted out, leaving the family business without strategic direction, sometimes for years.

It is often beneficial for the income and capital requirements of the senior generation to be addressed at an earlier stage, and for preparations for succession to be put in place with specialist advice. It is vital for the future growth and success of the business for the ownership to be gifted to the right individuals. As a result, it is important to assess how shares should be divided and how the process should be managed. There are a number of routes which can be considered, all offering their own unique set of benefits.

Engineering a ‘family management buyout’

Forming a ‘family management buyout’ could focus minds on the business in the same way that a commercial management buyout does. Typically, the trading company will borrow a significant sum and the second generation then need to keep the business trading profitably in order to pay down debt over the medium term. 

The senior generation depart and the second generation get down to work. It’s a simple enough principle, but should be performed with the benefit of specialist advice to get the structure, legal paperwork and administration in order. It is usually a good idea to request HM Revenue and Customs tax clearances before irrevocable steps are taken.

Considering wealth transfer at an earlier stage

Lifetime gifts of family company shares can be a great way to ‘pass the baton’. Those who do not get shares can be compensated in other ways. Capital Gains Tax needs to be considered, but gifts relief may be a tax mitigating option in the right circumstances.   

Consider a Family Council

Where the shares are of a greater value and constitute a large proportion of total wealth, other strategies can come into play. A separation of management from shareholder relations, through a board of directors, can be helpful in this instance. The interests of the second generation, if not formalised, can become a heavy burden on management time. In this circumstance, a Family Council can be constituted to govern such relations. This can help enable management to deliver profitable and sustainable business, paying due regard to the family’s legitimate dividend expectations.

A trade sale / sale to and Employee Ownership Trust

The owner may feel that the time is right to dispose of the business for a capital sum and then use that to satisfy their needs and that of their family. All options should be considered and there may be some the owner has not thought of. Despite political uncertainty, a trade sale could be the answer and should not be discounted. We have seen owners increasingly interested in tax-free disposals to Employee Ownership Trusts. The idea of extracting useful capital over the medium term, combined with a philanthropic feeling which comes with creating an employee-owned organisation can appeal to many.

Next steps

Succession planning can be daunting and a good advisor can help clarify thinking while ensuring that the wealth of the business owner is protected. We help a diverse range of family businesses prepare for their next chapter and achieve business succession in a variety of ways. Whether it is planning for retirement, passing ownership of the business to the next generation or divestment of non-core business, the importance of being prepared should not be underestimated.

This article was first published in the December 2019/January 2020 edition of South East Business Magazine.

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Simon Warne
Simon Warne
Partner, Private Clients