Succession Planning Should Be Priority for Family-Owned Firms; LEGAL & FINANCE Two-Thirds of Family or Owner-Managed Business Owners Have No Succession Plans in Place When It Comes to the Departure of Key Staff. Jeremy C Larke-Morris, Head of Taxation Services at Chartered Accountants and Business Advisers Kendall Wadley, Discusses What Business Owners Need to Consider When Planning for Such an Event
Byline: Jeremy C larke-Morris
Succession planning should be a priority for every family business and early planning is essential. Over two-thirds of companies are family owned and most have no clear exit plan. It is usually the vision and drive of its founder that made the company a success, but at some point the founder will want to retire, or move on.
Retiring from a family owned business is not just a case of deciding not to go to work.
Will you have enough to retire on? Who will manage the business when the founder retires? Will the business carry on or will it be sold? How will ownership be transferred?
These are emotive issues, but they must be tackled early on to ensure effective planning.
With regards to family succession, many owners would like to see their business pass to future generations, but in reality this happens in only about 30 per cent of cases.
It is crucial owners establish at an early stage whether or not a family member has the ability and drive to take on their business. If a family member is to take over, it is advisable they "learn the trade" with another employer. Even then, are you sure they are the best person to take your business forward? Would it be better to bring in an outsider?
A management buy in is another option for securing the future of your business. It can be very difficult for a small business to attract high calibre employees with a proven track record, but once this hurdle has been overcome, the owners need to ensure they retain key members as they may also be the key to his or her retirement.
With the use of tax efficient share options, you can both attract and retain key members of the business. Once the owner has established a management team that they can rely on, and trust to take the business forward, the management team should find no problem raising the cash to purchase the business.
If retirement is your option, there are many helpful tax breaks. These include:
Roll-over relief - this enables the donor (the person selling the business) to gift shares to family members free of capital gains tax (the donor effectively inherits the original base cost of the business)
Business property relief - the value of a business left in an individual's estate is eligible for 100 per cent business property relief and no inheritance tax is therefore payable on the value of the business
Buy-back of shares - companies have the ability to buy back their own shares from a retiring shareholder
Entrepreneurs relief - this has recently replaced the much more favourable business asset taper relief, but should you sell a business, then you still pay an effective rate of 10 per cent CGT on the first pounds 1 million worth of qualifying gains (this is a lifetime rate) Another option is to sell the business and there may be advantages in pursuing this strategy. …