Business Update December 2011 - Passing On A Family Business


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Business Update December 2011 - Passing On A Family Business

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Business Update December 2011 - Passing On A Family Business

  1. 1. Active PrActice UPDATEs DeceMBer 2011 plummerparsons apdec2011-pobPassing on a familybusinessWith ‘baby boomers’ now attaining state retirement age there is anincreasing number of family businesses that will be handing over thereins in the ensuing years. Business UPDATEResearch carried out on behalf of the Institutefor Family Business (IFB) found that only 30 later in their lives, will want to take over the running of the firm, or that your children will Planning a familyper cent of leading UK businesses that were be best equipped to manage the business. successionfamily controlled in 1996 were in the same That is why it is important to prepare the If it is your aim to pass on your enterprisehands a decade later. Of the others, 42 way for a family succession carefully and to your family, it is vital you involve yourper cent were taken over, and family control dispassionately and, most importantly, children in the business as soon as ithad been conceded in 28 per cent through well in advance of any changeover. The is possible and in as many aspects ofa dilution of hereditary shareholding. This fundamental question you must ask yourself its running as possible, from productmeans that British firms have been passing is whether a family succession is the best development to sales and marketing, fromout of family control at twice the rate than decision for the firm. It may be that other, financial management to staff management.elsewhere in Europe. younger family members do not have the This will not only provide them with aBenefits and risks ambition or the skills to assume control of the business. It may be that a succession can proper understanding of how the business works, it will also give them a real chanceThere are clearly a number of important create tensions and conflicts within both the to discover if certain roles suit and interestconsiderations to take on board when family and the firm itself. them. You will, after all, want them to be asplanning to pass a business on to the next enthusiastic about the future success of the And don’t forget that your family could still firm as you have been. But never coercegeneration of your family. benefit through a sale of the business, or a relative – allow them the space to makeThe assets remain within the family, which through a management buy-out or flotation. their own choices about their careers.can bring long-term security to your children Or, indeed, through recruiting professionaland relatives and the career prospects of managers to ensure that the enterprisethe next generation are looked after. All your remains a source of income irrespectivehard work in building up the business doesn’t of the actual involvement of any familygo to benefit another owner or company. But members.there are risks to be assessed as well. Youwill have no guarantee that your children,18 Hyde Gardens BN21 4PT01323 431 200
  2. 2. Passing on a family businessEncouraging them to gain experience to delegate to those more experienced Remember that entrepreneurs’ relief has beenof working in other businesses and in certain areas than themselves, the introduced. Under the scheme as it currentlyareas beforehand will help to broaden vision to grow and develop the business. stands, an owner will be subject to tax at 10their outlook on how the business world When considering succession, hold open per cent on qualifying gains made from theoperates. It may also deepen their conversations with your family to find out if material disposal of business assets up to theappreciation of what is needed to make a they are truly committed to the enterprise for £10 million lifetime limit. Entrepreneurs’ reliefsuccess of developing the family firm. the long haul. But always balance cold-eyed may be due on the disposal of all or part of objectivity with fairness – you will have a business, the disposal of the assets in theYou must take other, more specific issues an emotional duty to every family member business after it has stopped trading or theinto account as well. You will need to whether or not they possess the business disposal of shares in a company. Eligibilitydecide where responsibility and control flair needed to take over the operation of for relief is subject to specific conditionslie, and to balance the demands of the the firm. A successful succession is as much being satisfied. In order to benefit from thebusiness duties you hand to some members about family harmony as it is about the relief on the disposal of shares in a company,of your family with the shareholdings harmony of the business. you will need at least a 5 per cent holdingyou give to others. Should, for example, in the ordinary share capital, and that givessome family members be given seniormanagement duties, then their shares Is the business a you at least 5 per cent of the voting rights,might come with full voting rights, while genuine inheritance? you will also need to work in the company or to hold a place on its board throughoutthose shares assigned to family members Coming to a realistic assessment of the future a qualifying period of one year prior towithout direct involvement in the firm could viability of the business is another important disposal. Any sales of assets above £10be non-voting but with preferential rights to matter (a firm must be worth handing on million are subject to a capital gains tax ratedividends. if it is not to become a burden to your of 28 per cent, although if this is not theFrom this it should be clear that a family children). So come to a realistic assessment disposal of one asset then a small proportionsuccession cannot be a relatively last- of the value of the business and an equally of the gain could be taxed at 18 per cent.minute decision. It takes years. Even to hard-headed judgement of its potential in the There is also the possibility of a businessthe point that, when you first set up the years to come. property relief on inheritance tax if an ownerbusiness, you should be thinking about passes a firm or shares to relatives. As aits eventual disposal. Timetable across Tax result, you may be able to carry out a transferthe long term, plotting the stages that will that is free of inheritance tax, although thelead up to the transition, noting those of Questions of tax are equally pertinent. There specific circumstances of each businessyour children or relatives who look best have been several reforms of the capital should be explored.fitted for the roles they may later assume, gains tax system in recent Budgets, and moretraining them accordingly, and ensuring may be in the offing.that relationships between them and otherkey members of the firm are set on aconfident, open footing. When the timecomes for you to move aside, manage it in summary A non-executive director can play a critical role in offering a proportionate, reliablya way that is phased so that the switch of There are a wide range of related planning disinterested viewpoint. And don’t forget thatresponsibilities is conducted smoothly. issues that need to be considered especially as your accountants we will be able to makeWhat to look for the impact of passing on the business on available income after the transfer of the an overall judgement about the direction of a family firm, and will also be in a positionIt is challenging but imperative to be business. Taking an objective view of such to provide professional, expert guidance onunsentimental about a family succession. matters can be notoriously difficult when how best to handle the often complex taxThe business and the ability of your personal family relations form part of the implications of any succession, and to adviserelatives to benefit from it will be equation. Which is why it is essential to on matters such as shareholders’ agreementscompromised if the firm falters once it consult others who may not be quite so close and amending a company’s articles ofhas been handed on. So look for family to the business. association. The next step? It is never toomembers who possess the right qualities early to start planning for the day you willdemanded by running a business: good hand over the reins. Please contact us forleadership, commercial acumen, the ability help and advice. Please contact us if you would like to discuss passing on a family business