Business coverage in the press often focuses on large multinationals and publicly-listed companies, but the reality is that most firms are family owned. Although the failure rate for new enterprises can be high in the early days, once a family business has established itself, it can often become very long-lived. And that raises very important questions about succession planning.
It’s sometimes difficult to envisage the circumstances in which you’d relinquish the reins of a company that you or your parents helped to found. After all the blood, sweat and tears that have been involved in building the company up, you may be understandably protective of what you’ve created. But an exit strategy of some kind is essential if you want to make sure the company is in safe hands when you’re no longer able to continue playing an active role.
It’s worth reviewing your options at an early stage in conjunction with your accountants. One possibility is obviously that you start to wind the business down. Another route is a straightforward trade sale. But if, like many people, you want to keep wealth and ownership within your family, there are some important questions you need to address.
Although your children are the obvious choice as successors, things may not always be clear cut. Perhaps they don’t actually show any inclination to follow in your footsteps? The ideal successor will often be a son or daughter who’s shown an active interest in the business and already played some role in its success. Can you be sure, however, that they have a broad enough perspective to help the company meet the challenges that lie ahead?
Some business owners actively encourage their children to go out into the wider world to pick up skills and experience that can ultimately be transferred back to the family firm. Gaining a qualification in law or accountancy can be very useful, for instance. Or perhaps developing an in-depth understanding of sales and marketing while spending time with a blue-chip corporation.
If you’re thinking ahead in this way, you might also want to consider other changes. Is there an argument for strengthening the management team? Or bringing in non-executive directors with relevant expertise?
Your accountant can provide an independent sounding board for this type of planning. At the same time, they’ll be able to talk you through any tax implications of a handover from one generation to another.
Generally speaking, such transfers will be exempt from inheritance tax, as we’re talking about a business asset which would be exempt and therefore effectively sit outside your estate. If you choose to sell the business and pass on the cash raised, however, that will be classed as part of your estate for inheritance tax purposes.
One option to consider is the transferring of shares well in advance of your death, perhaps over a period of time. Although Capital Gains Tax will be payable, Entrepreneur’s Relief should apply to lessen the burden.
Most accountants will have experience of addressing this type of issue alongside their clients. But their message would be that it’s never too early to start the discussion.
Paul Crichton, Managing Partner