How to plan your Family Business Transition

The example below has been drawn from the cases of a few clients to illustrates the typical issues faced when business owners seek to pass their Family business down to the next generation.

Background

S Limited is a long standing trading company run and owned 50/50 by Mr & Mrs A.  Their son John is involved in the business, but, is still ‘learning the ropes’.  However Mr & Mrs A are both in their 60’s and have decided that the time is right to take more of a back seat and pass some control to John.  Their other child, Sally, does not wish to work in the business.

Their key goal is to ensure the on-going success of the business under John, which would allow them to look after their staff and in turn their daughter Sally and her 2 children.

This is perfectly usual and a common feature of family businesses – the intrinsic link between family, love and compassion and the business, the wealth creator.

What were the key issues? 

When they raised this with us our first meeting was purely fact finding.  Our experience led us to ask the right questions and it became clear the key challenges were:

1. Leadership – Whilst a competent Operations man, John lacked the leadership skills to run the business. This also concerned their 2 key managers whose contribution was vital to the future of the business.
2. How much did Mr & Mrs. A’s need to retire? – What were their existing investment and pensions? What do they want to after they retire and how much does all that cost?
3. How much was the business worth and what can it afford to pay? – How will Mr & Mrs A get paid without affecting the viability of the business?
4. Tax planning was required to mitigate the inevitable tax bill – Mr A understood, from talking to a close family friend who had retired from his business a few years earlier, that a succession plan was a golden opportunity to get a lot of current and future profit out of the company at a very low rate of tax, and he liked the idea of that.
5. The succession plan and securing a successful legacy – How the issues in 1 to 4 interlink and impact on the choices Mr. and Mrs A had and the decisions they were to make. It was important for the good stable relationships within the family to be maintained and ideally enhanced.

With this information we could provide cash flows for their retirement and the business to help inform the decisions Mr. & Mrs. A made.

In terms of the family and business we could start to plan:

• How we fill the skills gap left when Mr & Mrs A retire?
• How long will the preparation phase be and therefore when can they retire?
• In terms of tax, what remuneration strategy is required pre and post retirement?
• The best way of funding the proposed payment structure, without restricitng growth?
• What was the best legal framework to protect the business and engage key employees?
• The outline of a vision and set of wishes to be embodied in a Family Charter.

Explaining the options

After the information and planning stages we sat down with Mr. & Mrs. A and explained their options – including a discussion as to the best courses of action and the pros and cons of each.

The options chosen are unique family decisions informed, but not driven, by any one legal, tax, business or investment factor.

Consultation

Before settling upon the appropriate course of action we set about a consultation exercise with the other stakeholders, John, Sally and the senior management team of S Ltd.

This is a crucial stage often overlooked by other advisers.  The impact on and viewpoint of the various stakeholders varies depending on where you stand in the family and business dynamic:

• Sally may be concerned about fairness and equality with her Brother
• The senior management team, will be concerned about nepotism, job security and their reward for taking on extra responsibility.
• John may be concerned about his role and how much of a leadership role he wanted.

We explained the process, the choices, and the opportunity for them in a way that removed the “personality” from the decision, often the hardest part when Family Business transitions to the next generation.

Only a holistic joined up approach can deal with and consider these competing aspects.

Our consultation process ensures this is done in a transparent and fair way allowing everyone to share, confidentially, any concerns and reservations.

This process is proven to give the business and family the best chance of securing a lasting legacy for the family, maintaining harmony between siblings and setting the scene for the business to thrive in the future, providing continuity of employment for key managers and a secure and happy retirement for those leaving the business.

The result?

Business: – we instigated a program of training and development for John and the senior team.

We were clear around the plan for John and the team to acquire the business off Mr. & Mrs A. in one years’ time if all went to plan – the value would be paid off over 4 years from a lump sum and future cash-flow in the business all achieved without harming growth.

Key Managers: – Granting some share options for the senior team in the meantime to vest in 3-5 years time depending on certain performance conditions being met.

Mr. & Mrs. As:- were comfortable that with the planning they had undertaken their lifestyle in retirement wouldn’t change dramatically and the price for S Limited would secure their future.

They were going to buy a holiday home for them and their children to use in Florida for £500,000, hence the importance of the lump sum. They also intended to gift John 15% of the shares in the company and make a gift to Sally of equivalent value.

Sally had divorced and they were keen to protect the gift for their grandchildren in case Sally made a second bad ‘match’.  We set up a trust for this purpose to protect the value and assets for the future.

Family Charter:- the Family Charter set out the reasoning for the choices made and their wishes around future ownership of the business (restricted to those working in the business) and for the wealth to benefit future generations of the family (social and educational funds were created).

To date they have not done any IHT planning, but want to explore options available …….