Many successful entrepreneurs want to hand over their business to a family member – but what happens if there is no clear successor?
Equally, what are your options if there is an obvious family candidate, but he or she does not want to do the job?
Here are five points to reflect on when it comes to succession.
Things can get emotional
You might have spent decades building a thriving business from scratch, only to discover that there is no one in the family ready or willing to take it on. Not only that, but you might also fear that at least some of the wealth generated by the business might be lost to future generations if they do not remain involved.
These fears are not unfounded. Succession is the biggest issue facing family businesses and failure to get it right can result in lost momentum. Research from PwC found that only 30% of family businesses have formalised succession planning in place, while 82% said that ‘protecting the business as the most important family asset’ was their top long-term personal goal.1
Don’t despair if you can’t pass the business on to your family
Despite the emotional attachment, it might not be a bad thing if you can’t hand your business on to the next generation.
The concept of ‘shirt sleeves to shirt sleeves in three generations’ suggests that grandchildren are often ill-equipped to control a family business when compared with the earlier generations who built it in the first place. This, so the theory goes, is because the new generation has grown up in relative comfort and does not have the hunger or business knowledge of older family members.
There are plenty of family businesses that disprove the shirt-sleeves theory, but it can often pay to bring in business talent from outside the family when you’re thinking about an exit.
“It’s really important to understand what the purpose of the business is and what the intention of the family is,” says Fiona Graham, Director of External Affairs and Policy at the Institute for Family Business. “Are the next generation interested in working in the business? You might need to think about external talent and bringing them in and developing them. The further out you start planning, the more time you have to develop these skills.”
Consider a management buyout
If there is not an obvious family member to take over the business and you are still set on an exit, a management buyout (MBO) can be a good option.
A MBO involves the company’s existing management pooling their resources to buy out the owner. It can be the right course of action if you have a settled management team whom you trust to take the business forward in a positive direction. An MBO can ensure a smoother succession than selling to an external buyer because you know the team and believe in their abilities. Many founders will remain connected to the business through shareholdings or in an advisory role.
You will qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which reduces your tax burden to 10% on proceeds of up to £1 million. Seek financial advice about the other tax implications of an MBO.
An employee-ownership structure can help you give something back
An increasingly popular option for entrepreneurs is to sell the business to their employees via an Employee Ownership Trust (EOT). This can be a reward for hardworking staff and can give you peace of mind that the business remains in safe hands.
There are also some appealing tax benefits when selling to an EOT. Disposals to the trust can be made free from Capital Gains Tax and Inheritance Tax, while employees can receive tax-free bonuses from the EOT. Again, seek advice.
Take your time
Whatever your decision, don’t rush into it. If there are younger generations who are willing – but not yet ready – to take over, then bringing them into the business to help them learn on the job can bridge the gap.
Equally, if you are considering a sale, take time to evaluate the options. Keeping some continuity through a management buyout or EOT might represent the best outcome.
“Succession is a gradual process over a long period, and that’s how it’s done best and most successfully,” concludes Fiona.
However you’re organising your succession, speak to us to ensure you’re making the most of your tax allowances.
Many successful entrepreneurs want to hand over their business to a family member – but what happens if there is no clear successor?
Equally, what are your options if there is an obvious family candidate, but he or she does not want to do the job?
Here are five points to reflect on when it comes to succession.
Things can get emotional
You might have spent decades building a thriving business from scratch, only to discover that there is no one in the family ready or willing to take it on. Not only that, but you might also fear that at least some of the wealth generated by the business might be lost to future generations if they do not remain involved.
These fears are not unfounded. Succession is the biggest issue facing family businesses and failure to get it right can result in lost momentum. Research from PwC found that only 30% of family businesses have formalised succession planning in place, while 82% said that ‘protecting the business as the most important family asset’ was their top long-term personal goal.1
Don’t despair if you can’t pass the business on to your family
Despite the emotional attachment, it might not be a bad thing if you can’t hand your business on to the next generation.
The concept of ‘shirt sleeves to shirt sleeves in three generations’ suggests that grandchildren are often ill-equipped to control a family business when compared with the earlier generations who built it in the first place. This, so the theory goes, is because the new generation has grown up in relative comfort and does not have the hunger or business knowledge of older family members.
There are plenty of family businesses that disprove the shirt-sleeves theory, but it can often pay to bring in business talent from outside the family when you’re thinking about an exit.
“It’s really important to understand what the purpose of the business is and what the intention of the family is,” says Fiona Graham, Director of External Affairs and Policy at the Institute for Family Business. “Are the next generation interested in working in the business? You might need to think about external talent and bringing them in and developing them. The further out you start planning, the more time you have to develop these skills.”
Consider a management buyout
If there is not an obvious family member to take over the business and you are still set on an exit, a management buyout (MBO) can be a good option.
A MBO involves the company’s existing management pooling their resources to buy out the owner. It can be the right course of action if you have a settled management team whom you trust to take the business forward in a positive direction. An MBO can ensure a smoother succession than selling to an external buyer because you know the team and believe in their abilities. Many founders will remain connected to the business through shareholdings or in an advisory role.
You will qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which reduces your tax burden to 10% on proceeds of up to £1 million. Seek financial advice about the other tax implications of an MBO.
An employee-ownership structure can help you give something back
An increasingly popular option for entrepreneurs is to sell the business to their employees via an Employee Ownership Trust (EOT). This can be a reward for hardworking staff and can give you peace of mind that the business remains in safe hands.
There are also some appealing tax benefits when selling to an EOT. Disposals to the trust can be made free from Capital Gains Tax and Inheritance Tax, while employees can receive tax-free bonuses from the EOT. Again, seek advice.
Take your time
Whatever your decision, don’t rush into it. If there are younger generations who are willing – but not yet ready – to take over, then bringing them into the business to help them learn on the job can bridge the gap.
Equally, if you are considering a sale, take time to evaluate the options. Keeping some continuity through a management buyout or EOT might represent the best outcome.
“Succession is a gradual process over a long period, and that’s how it’s done best and most successfully,” concludes Fiona.
However you’re organising your succession, speak to us to ensure you’re making the most of your tax allowances.
Many successful entrepreneurs want to hand over their business to a family member – but what happens if there is no clear successor?
Equally, what are your options if there is an obvious family candidate, but he or she does not want to do the job?
Here are five points to reflect on when it comes to succession.
Things can get emotional
You might have spent decades building a thriving business from scratch, only to discover that there is no one in the family ready or willing to take it on. Not only that, but you might also fear that at least some of the wealth generated by the business might be lost to future generations if they do not remain involved.
These fears are not unfounded. Succession is the biggest issue facing family businesses and failure to get it right can result in lost momentum. Research from PwC found that only 30% of family businesses have formalised succession planning in place, while 82% said that ‘protecting the business as the most important family asset’ was their top long-term personal goal.1
Don’t despair if you can’t pass the business on to your family
Despite the emotional attachment, it might not be a bad thing if you can’t hand your business on to the next generation.
The concept of ‘shirt sleeves to shirt sleeves in three generations’ suggests that grandchildren are often ill-equipped to control a family business when compared with the earlier generations who built it in the first place. This, so the theory goes, is because the new generation has grown up in relative comfort and does not have the hunger or business knowledge of older family members.
There are plenty of family businesses that disprove the shirt-sleeves theory, but it can often pay to bring in business talent from outside the family when you’re thinking about an exit.
“It’s really important to understand what the purpose of the business is and what the intention of the family is,” says Fiona Graham, Director of External Affairs and Policy at the Institute for Family Business. “Are the next generation interested in working in the business? You might need to think about external talent and bringing them in and developing them. The further out you start planning, the more time you have to develop these skills.”
Consider a management buyout
If there is not an obvious family member to take over the business and you are still set on an exit, a management buyout (MBO) can be a good option.
A MBO involves the company’s existing management pooling their resources to buy out the owner. It can be the right course of action if you have a settled management team whom you trust to take the business forward in a positive direction. An MBO can ensure a smoother succession than selling to an external buyer because you know the team and believe in their abilities. Many founders will remain connected to the business through shareholdings or in an advisory role.
You will qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which reduces your tax burden to 10% on proceeds of up to £1 million. Seek financial advice about the other tax implications of an MBO.
An employee-ownership structure can help you give something back
An increasingly popular option for entrepreneurs is to sell the business to their employees via an Employee Ownership Trust (EOT). This can be a reward for hardworking staff and can give you peace of mind that the business remains in safe hands.
There are also some appealing tax benefits when selling to an EOT. Disposals to the trust can be made free from Capital Gains Tax and Inheritance Tax, while employees can receive tax-free bonuses from the EOT. Again, seek advice.
Take your time
Whatever your decision, don’t rush into it. If there are younger generations who are willing – but not yet ready – to take over, then bringing them into the business to help them learn on the job can bridge the gap.
Equally, if you are considering a sale, take time to evaluate the options. Keeping some continuity through a management buyout or EOT might represent the best outcome.
“Succession is a gradual process over a long period, and that’s how it’s done best and most successfully,” concludes Fiona.
However you’re organising your succession, speak to us to ensure you’re making the most of your tax allowances.