Passing on a family business to the next generation or selling it to the management team or a trade buyer can be a difficult and emotional process and it is wise to start planning early. Among the key aspects to look at is funding, according to John Bowe, corporate finance deals partner with Mazars.
“Many family-owned companies will naturally want to hand ownership to the next generation,” he says. “However, the retiring family members will often need to fund their retirement. The new owners will want to ensure that whatever funding is put in place does not hamstring the business from a working capital or growth perspective. Funding options can include bank debt and working capital facilities like invoice discounting can also be used to release capital to fund a transition.”
A management buyout (MBO) has numerous advantages, but again, funding must be taken into consideration. “Business disruption will be minimal provided the MBO team have the skillset and capability to run the business without the family founders,” says Bowe. “The team knows the business so negotiations should be smoother. The challenge will be around funding.”
There are three elements to many funding packages, he adds. External equity, debt in the form bank loans, debt funds and vendor loan notes, and management team equity.
“Depending on the size of the transaction to be funded, all or a mix of these funding solutions can be used to finance the deal,” he says. “The good news is the Irish market has never had as many funding options available. Domestic private-equity players and debt funds are actively looking to work with management teams.”
The banks are also supportive of MBO deals, with debt quite keenly priced.
Running a competitive sale process to a trade or private-equity buyer is an area which Mazars focuses on. “Selling a company to a third party requires significant preparation and the sooner you start that process the better,” Bowe says. “Key will be finding the right fit for your family business in terms of the combination of skills, experience and future commitment, at the right valuation. A good adviser will help map this out for you and we are open to discuss succession at any stage.”
Tax efficiency
Tax efficiency is another important consideration, according to Mazars tax partner Alan Murray. “Considering how you exit the business is essential if you want to maximise the cash you can extract and minimise your tax liability,” he advises. “When it comes to a sale, you may qualify for capital gains tax (CGT) retirement relief. This relief can reduce the 33 per cent CGT rate that is chargeable on certain gains to zero per cent up to a threshold of €500,000 or €750,000 depending on the circumstances. There is also entrepreneur relief to consider. This reduces your CGT bill to 10 per cent on gains from the disposal of qualifying business assets up to a lifetime threshold of €1 million.”
No cap applies if you decide to pass your shares on to family members connected with the business, as long as you are between the ages of 55 and 65, in which case no CGT may apply. In addition, family recipients can take advantage of certain tax reliefs such as business property relief, which, subject to qualification, means they may only pay capital acquisitions tax on 10 per cent of the business value gifted.
Attention must be paid to the conditions attaching to these tax reliefs, however. “To qualify for CGT retirement relief, you need to be at least 55 years old and have held the shares for a minimum of years. If you sell when you are 66 or over, the tax-free threshold is reduced to €500,000. If you pass the business on to family members when you are over 66, there will be a 33 per cent CGT liability for businesses valued over €3 million.”
It is also essential to ensure that no non-business assets are held on the balance sheet, as this will dilute the sale value and reduce the amount of retirement relief available to claim.
“A good example of non-business assets would be if you have used excess cash in the company to invest in shares. While these are technically assets, if they are not held for the direct purpose of the business, then they cannot be included when calculating the amount of retirement relief you can claim,” Murray says.
“Of course, how and when you exit your business depends on a wide range of factors that need careful consideration, not least the emotional impact on your wellbeing. Planning your exit options and carefully assessing the tax reliefs available can help remove any financial surprises ahead.”