Passing on a family business may not be as fraught a process as that portrayed in the Sky TV hit series Succession but it can be difficult and hazardous for even the smallest of businesses. “Succession planning should effectively begin on the day you set up the business,” advises Mazars tax partner Alan Murray. “You could be storing up problems if you don’t.”
Interestingly, while tax considerations can be uppermost on many people’s minds when passing on valuable assets to the next generation, Murray says they should not, initially, be the first priority.
“Some people may be too focused on the idea of saving tax. I usually tell them that this is just one aspect, albeit quite important. They need to focus on doing the right thing from the family and business point of view. If you have a good profitable business you have a responsibility as a steward of that business not to give it away to someone who can’t run it or isn’t interested in it.”
That’s where succession problems tend to start – deciding who to pass the business on to. “Owners have to ask who the best person is to get the business,” says Murray. “It is usually someone who is already involved in the business or has the financial and business acumen to run it. There are instances where owners get a third party to vet the suitability of family members to take over the business. You can find that while they have individual strengths and talents they may not be the right fit for the business or that one of them may be suited to it while the others are not.”
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That process can allow for an orderly transfer over time. “They might consider getting one of the children in at an early stage. They can give them a small percentage of the equity and let them grow that gradually until they take over.”
The alternative is potentially ruinous. “A business can be a millstone around children’s necks if they are not interested in it. They might just try to convert it into cash as quickly as they can or they might bleed it dry by using it to fund a personal lifestyle. That’s not good for anyone. In that situation the best advice may be to sell the company. That’s when you need to look at tax considerations like Retirement Relief and Entrepreneurs Relief. By availing of these reliefs it is possible for people to reduce their tax bill quite significantly if the structuring is completed correctly. This is where a tax adviser can add value.”
In the event of the business being sold the question of what to do with the proceeds comes up. “You can use it to set up a family partnership to invest in different assets. You can just give the money to the children, but you won’t get retirement relief for that. You can also look at setting up businesses with the children and co-investing in them.”
The situation is somewhat different for larger businesses. “If the company is very successful with a strong management team in place, that makes a big difference,” he says. “In larger companies the top management will probably have an equity stake anyway. That opens up lots of possibilities.”
Those possibilities include a management buyout (MBO) with the family retaining a minority shareholding. This would allow the children to continue to benefit from the success of the company while it would be run by people who have proven to be well capable of doing so. It would also free up cash to be used by the owner for other purposes or indeed to distribute to children who may not be interested in retaining a stake in the business.
The ability to engage in creative solutions like that is dependent on the business being properly set up in the first place, says Murray. “Lots of businesses are set up by two spouses but that isn’t always reflected in the share allocation or other aspects of the business. The two spouses should have equity shares in the business, and they should also be employees of the business. It is often the case that one spouse will step back from the business to take on family caring responsibilities for a number of years, but they remain involved in the business. They should remain as an employee to reflect that involvement. You don’t get tax relief when it comes to disposing of or passing on the business if you haven’t worked in it.
“Finally, when it comes to succession planning the best advice always is to do what is right from a family and commercial perspective.”