Exit, sale or succession

Ensuring a smooth succession

To secure the future of your family business when you exit, it’s vital to plan ahead and define the company’s purpose and values

Ensuring a smooth succession

To secure the future of your family business when you exit, it’s vital to plan ahead and define the company’s purpose and values

Ensuring a smooth succession

To secure the future of your family business when you exit, it’s vital to plan ahead and define the company’s purpose and values

Family Business 1200X720

It is hard to overstate the importance of family businesses to the UK economy.

According to the Institute for Family Business (IFB) Research Foundation, there were 5.2 million family-owned businesses operating in 2019, which was 86.2% of the total number of companies in the private sector. They employed more than 14.2 million people and contributed £637 billion to UK GDP.1

Each family business has its own story to tell: of sacrifices made to get the company off the ground; of opportunities missed and taken; and, when the day comes to retire, of ensuring proper succession is in place to leave behind a strong legacy.

The COVID-19 pandemic has thrown into sharp focus the need for family-owned companies to plan for the future. While many have been able to weather the financial storm, the long periods of uncertainty have given owners the opportunity to consider what lies ahead and ask questions about how their business should be run when they decide to step down.

Many are coming from a position of strength. Despite the enormous economic shockwaves caused by the pandemic, family businesses proved their resilience. A global survey by PwC of 2,801 family-owned companies found that 79% needed no additional capital in 2020, and only 34% cut dividends during the crisis. What’s more, 86% expected a return to pre-pandemic growth rates in 2022.2

Still, the decision to hand over their business is the toughest an owner ever has to make, and passing the baton is fraught with challenges. Among them is deciding if the next generation is ready – or willing – to take over, working out what to do if they are not and managing expectations with employees. That’s before addressing the tax and legal issues that arise when deciding to exit any business.

Despite the importance of succession, surprisingly few have a formal strategy in place. The PwC survey found that just 30% have started succession planning, while only 51% have a documented vision and written purpose statement.3

When considering stepping away from your business, “one of the really important things to think about is the separation between ownership and management”, says Fiona Graham, Director of External Affairs and Policy at the IFB. “Just because you’re retiring, it doesn’t necessarily mean you’re going to stop being an owner of the business. The dividends [from family companies] often form an important part of an owner’s pension.”

Graham advises that succession planning is “not a one-off event” and should be a “gradual process” over a long period of time.

One of the key decisions is whether the next generation is able to take over running the business. While it might seem the right thing to do, it can often be the wrong decision for the company. According to the IFB’s research, only 9.1% of medium-sized family businesses were in their third generation of ownership and 5.9% in their fourth.4

It can often pay to bring in accomplished outside executives to run the business while the next generation – should they want to be involved – learns the ropes before taking over. When there is no obvious successor, finding a buyer can be the best option, provided the right price can be agreed and guarantees over the future direction of the business are accepted. The main tax considerations for owners selling their business are Capital Gains Tax and Inheritance Tax, should proceeds be passed to other family members.

However, selling is not always the right option. Routes such as management buyouts or the establishment of an employee ownership trust offer owners the opportunity to realise gains in the value of the business while also securing some control over its future. Trusts are becoming more popular because they offer Capital Gains Tax exemptions for owners.

Whatever route you opt to take when stepping back from a family company, seeking the right advice is crucial, especially when deciding the purpose of your business – a vital step when making decisions on its future.

“It’s something you need to articulate and write down,” says Graham. “You need to make sure you’re all pulling in the right direction and it’s not just assumed. An adviser or facilitator can be really helpful in asking the right sort of questions to help you understand [the business’s] purpose and values.”

St. James’s Place can advise how to extract the most value from your business to help you secure your future – and that of your family.

It is hard to overstate the importance of family businesses to the UK economy.

According to the Institute for Family Business (IFB) Research Foundation, there were 5.2 million family-owned businesses operating in 2019, which was 86.2% of the total number of companies in the private sector. They employed more than 14.2 million people and contributed £637 billion to UK GDP.1

Each family business has its own story to tell: of sacrifices made to get the company off the ground; of opportunities missed and taken; and, when the day comes to retire, of ensuring proper succession is in place to leave behind a strong legacy.

The COVID-19 pandemic has thrown into sharp focus the need for family-owned companies to plan for the future. While many have been able to weather the financial storm, the long periods of uncertainty have given owners the opportunity to consider what lies ahead and ask questions about how their business should be run when they decide to step down.

Many are coming from a position of strength. Despite the enormous economic shockwaves caused by the pandemic, family businesses proved their resilience. A global survey by PwC of 2,801 family-owned companies found that 79% needed no additional capital in 2020, and only 34% cut dividends during the crisis. What’s more, 86% expected a return to pre-pandemic growth rates in 2022.2

Still, the decision to hand over their business is the toughest an owner ever has to make, and passing the baton is fraught with challenges. Among them is deciding if the next generation is ready – or willing – to take over, working out what to do if they are not and managing expectations with employees. That’s before addressing the tax and legal issues that arise when deciding to exit any business.

Despite the importance of succession, surprisingly few have a formal strategy in place. The PwC survey found that just 30% have started succession planning, while only 51% have a documented vision and written purpose statement.3

When considering stepping away from your business, “one of the really important things to think about is the separation between ownership and management”, says Fiona Graham, Director of External Affairs and Policy at the IFB. “Just because you’re retiring, it doesn’t necessarily mean you’re going to stop being an owner of the business. The dividends [from family companies] often form an important part of an owner’s pension.”

Graham advises that succession planning is “not a one-off event” and should be a “gradual process” over a long period of time.

One of the key decisions is whether the next generation is able to take over running the business. While it might seem the right thing to do, it can often be the wrong decision for the company. According to the IFB’s research, only 9.1% of medium-sized family businesses were in their third generation of ownership and 5.9% in their fourth.4

It can often pay to bring in accomplished outside executives to run the business while the next generation – should they want to be involved – learns the ropes before taking over. When there is no obvious successor, finding a buyer can be the best option, provided the right price can be agreed and guarantees over the future direction of the business are accepted. The main tax considerations for owners selling their business are Capital Gains Tax and Inheritance Tax, should proceeds be passed to other family members.

However, selling is not always the right option. Routes such as management buyouts or the establishment of an employee ownership trust offer owners the opportunity to realise gains in the value of the business while also securing some control over its future. Trusts are becoming more popular because they offer Capital Gains Tax exemptions for owners.

Whatever route you opt to take when stepping back from a family company, seeking the right advice is crucial, especially when deciding the purpose of your business – a vital step when making decisions on its future.

“It’s something you need to articulate and write down,” says Graham. “You need to make sure you’re all pulling in the right direction and it’s not just assumed. An adviser or facilitator can be really helpful in asking the right sort of questions to help you understand [the business’s] purpose and values.”

St. James’s Place can advise how to extract the most value from your business to help you secure your future – and that of your family.

It is hard to overstate the importance of family businesses to the UK economy.

According to the Institute for Family Business (IFB) Research Foundation, there were 5.2 million family-owned businesses operating in 2019, which was 86.2% of the total number of companies in the private sector. They employed more than 14.2 million people and contributed £637 billion to UK GDP.1

Each family business has its own story to tell: of sacrifices made to get the company off the ground; of opportunities missed and taken; and, when the day comes to retire, of ensuring proper succession is in place to leave behind a strong legacy.

The COVID-19 pandemic has thrown into sharp focus the need for family-owned companies to plan for the future. While many have been able to weather the financial storm, the long periods of uncertainty have given owners the opportunity to consider what lies ahead and ask questions about how their business should be run when they decide to step down.

Many are coming from a position of strength. Despite the enormous economic shockwaves caused by the pandemic, family businesses proved their resilience. A global survey by PwC of 2,801 family-owned companies found that 79% needed no additional capital in 2020, and only 34% cut dividends during the crisis. What’s more, 86% expected a return to pre-pandemic growth rates in 2022.2

Still, the decision to hand over their business is the toughest an owner ever has to make, and passing the baton is fraught with challenges. Among them is deciding if the next generation is ready – or willing – to take over, working out what to do if they are not and managing expectations with employees. That’s before addressing the tax and legal issues that arise when deciding to exit any business.

Despite the importance of succession, surprisingly few have a formal strategy in place. The PwC survey found that just 30% have started succession planning, while only 51% have a documented vision and written purpose statement.3

When considering stepping away from your business, “one of the really important things to think about is the separation between ownership and management”, says Fiona Graham, Director of External Affairs and Policy at the IFB. “Just because you’re retiring, it doesn’t necessarily mean you’re going to stop being an owner of the business. The dividends [from family companies] often form an important part of an owner’s pension.”

Graham advises that succession planning is “not a one-off event” and should be a “gradual process” over a long period of time.

One of the key decisions is whether the next generation is able to take over running the business. While it might seem the right thing to do, it can often be the wrong decision for the company. According to the IFB’s research, only 9.1% of medium-sized family businesses were in their third generation of ownership and 5.9% in their fourth.4

It can often pay to bring in accomplished outside executives to run the business while the next generation – should they want to be involved – learns the ropes before taking over. When there is no obvious successor, finding a buyer can be the best option, provided the right price can be agreed and guarantees over the future direction of the business are accepted. The main tax considerations for owners selling their business are Capital Gains Tax and Inheritance Tax, should proceeds be passed to other family members.

However, selling is not always the right option. Routes such as management buyouts or the establishment of an employee ownership trust offer owners the opportunity to realise gains in the value of the business while also securing some control over its future. Trusts are becoming more popular because they offer Capital Gains Tax exemptions for owners.

Whatever route you opt to take when stepping back from a family company, seeking the right advice is crucial, especially when deciding the purpose of your business – a vital step when making decisions on its future.

“It’s something you need to articulate and write down,” says Graham. “You need to make sure you’re all pulling in the right direction and it’s not just assumed. An adviser or facilitator can be really helpful in asking the right sort of questions to help you understand [the business’s] purpose and values.”

St. James’s Place can advise how to extract the most value from your business to help you secure your future – and that of your family.

 


 

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Exit Strategies may include the referral to a service that is separate and distinct to those offered by St. James's Place.

Trusts are not regulated by the Financial Conduct Authority.

 

Sources:

1,4  The state of the nation: the UK family business sector in 2020/21, IFB Research Foundation, 2021

2,3  10th global family business survey: from trust to impact: why family businesses need to act now to ensure their legacy tomorrow, PwC (Based on 2,801 online surveys of owners and executives conducted in 87 territories between 5 October and 11 December 2020)

 


 

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Exit Strategies may include the referral to a service that is separate and distinct to those offered by St. James's Place.

Trusts are not regulated by the Financial Conduct Authority.

 

Sources:

1,4  The state of the nation: the UK family business sector in 2020/21, IFB Research Foundation, 2021

2,3  10th global family business survey: from trust to impact: why family businesses need to act now to ensure their legacy tomorrow, PwC (Based on 2,801 online surveys of owners and executives conducted in 87 territories between 5 October and 11 December 2020)

 


 

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Exit Strategies may include the referral to a service that is separate and distinct to those offered by St. James's Place.

Trusts are not regulated by the Financial Conduct Authority.

 

Sources:

1,4  The state of the nation: the UK family business sector in 2020/21, IFB Research Foundation, 2021

2,3  10th global family business survey: from trust to impact: why family businesses need to act now to ensure their legacy tomorrow, PwC (Based on 2,801 online surveys of owners and executives conducted in 87 territories between 5 October and 11 December 2020)