For many family businesses there is an unspoken assumption that the current owners would like to see the business transferred to the next generation. However, succession issues can be complex.
Before embarking on detailed planning, owners should consider all options. The starting point in this process is to be clear about your own objectives and to be realistic about others’ viewpoints.
Do any family members want to take over the business? If so, do they have the right skills or can they be trained in the time available? Most importantly, is the business viable for the future? It may not be kind to impose a declining family business on the next generation.
Early planning is crucial
If succession is the appropriate course, the next leaders of the business need to be identified and trained. If there are no natural successors and an exit is planned you need to ensure you maximise the value of your business at the point of exit.
As part of the exit planning process you will need to understand some key points:
– what is the value of your business? An accurate valuation may guide your decision on which option to pursue.
– who are the likely buyers and what aspects of the business will be of most interest to them?
– how can you recruit and retain a strong management team?
– how will the exit process work and what are your objectives. For example, are you looking to walk away with a lump sum with no strings attached or are you prepared to continue working in the business and possibly receive payments over an agreed period?
The main options, if family management is not to be continued, are:
– retaining ownership of the business while handing over the management to a non-family management team;
– selling the business (a trade sale); or
– a management buy-out (MBO).
Keeping the business, with a professional management team
If retaining ownership while taking a step back from day-to-day management of the business sounds like the right option, you will need to establish a fully functioning professional management team that is capable of leading the business in your absence.
“Professionalising” the business in this way needs long-term planning as you need to recruit and train the right people, establish incentives to motivate them and management procedures to ensure the business is soundly run. Thought needs to be given to the level of control and information which the family wish maintain.
Selling the business
Although this enables the family to step away from the business completely, a sale still requires long-term planning, both to ensure you maximise the value of what is likely to be the family’s principle asset and to ensure the business has a credible management team that a buyer will want to invest in.
In the absence of a full management team, a buyer is likely to expect you to remain involved in the business, which is often not appealing to a seller. Much can be done to prepare a business for sale and to ensure your business obtains its optimal sale price.
Management buy-out (MBO)
You may be focused on ensuring the continuation of your business for the benefit of your employees whilst also looking to sell the business. If this is the case, then an MBO may meet your objectives. A management buy-out is the purchase of the business by the existing management team.
As an initial step you need to consider whether the management would be interested in purchasing the business and whether the MBO is fundable (i.e. whether the management team would be able to raise the funds to buy the business).
Properly handled, an MBO can deliver a quick, clean exit leaving the business in the hands of a trusted management team. However it can be very complex, so it is important to get good advice early in the planning process.
As famously stated by Benjamin Franklin, “In this world nothing can be said to be certain, except death and taxes”. The sale of your business is likely to result in a tax liability. However, getting professional advice early in the process will give you the best opportunity to reduce your tax exposure. Most business owners will want to qualify for Entrepreneurs’ Relief which reduces the rate of capital gains tax payable to 10% on sale proceeds of up to £10m (this is a lifetime limit).
In some cases it may even be possible to sell a majority holding in the business with no tax liability (the government introduced a scheme in 2014 enabling the sale of a majority interest in a business to an employee trust with no capital gains tax liability).
A successful exit from your business needs careful planning in order to get the best possible outcome for yourself and the business, including getting good advice in valuation, tax and the exit process. This is not new advice but the old story of business owners leaving it too late and running out of options is all too common.
For more information visit: www.burges-salmon.com
Further reading on exit strategy: From start-up to big ticket exit in one year