Exiting a family business: a short guide

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

There were 4.8 million family businesses in the UK in 2021-22. They are hugely important to the UK economy, supplying 13.9 million jobs in 2020 (over 50% of the entire private sector workforce). Family businesses cover a wide range of firms, from small local pubs to large corporations – although there is a tendency for UK family businesses to fall into the categories of real estate, construction, storage or communication.

One of the most difficult transitions for a family business is an exit – i.e. someone deciding to leave. This might be abrupt and unexpected (perhaps due to family politics, which boil over) or planned and communicated (even amicably). In this guide, our Lincoln financial planners offer some ideas about managing the process in as effective and non-divisive a way as possible.

We hope these insights are useful. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:

01476 855 585
info@casfin.co.uk

Set out the goals

When someone (e.g. an adult child or a sibling) leaves a family business, it is not usually the same as other transactions. When someone outside the family sells their stake, the buyer and seller may never speak again. With a family business, however, the remaining owners (and, hopefully, the departing party) typically want to leave a legacy.

It helps if the founding owners clearly define and delineate their goals as early as possible. The first set of goals focuses on goals for income and retirement (i.e. how will the business provide for the owners?). The second set outlines the wider strategic intentions for the business. These answer key questions such as:

What is the direction of travel for the business over one, two or even three generations?
Throughout this time, where will the family sit? Will it continue to play a key role, or will outsiders gradually take the helm?
What will the ownership structure look like going forward?
How will family members be bought out if they do not want to be part of the vision?

Consider the family dynamics

Running a family business can involve confronting some hard truths. In particular, not all members provide the same value. Perhaps one sibling is excellent at sales, driving much of the revenue growth, whilst another fills a minor administrative role. When succession plans are discussed, this reality will come to the fore. Here, owners need wisdom to keep resentments and divisions at bay. Typically, this requires open and honest dialogue well ahead of concrete discussions about succession planning.

Families are often a melting pot of personalities, and family businesses are no different. A not-uncommon dynamic is the main business owner spoiling or favouring a chosen family member, perhaps in expectation that they will replace the owner when he/she retires. This can create an entitlement mentality, which is resented by other family members. If dynamics like these are not identified and corrected early on, then a family exit can lead to disastrous emotional escalations. Whilst owners may fear “rocking the boat” by pre-empting the matter, taking an avoidance approach can result in a lacklustre or even non-existent succession plan.

Starting the conversation

To establish a robust exit strategy for a family member, it will help to include your accountant and financial planner in the conversation. For instance, suppose you intend to pass down the business to all of your children. A shareholder agreement will likely play a key role in communicating your wishes and minimising family disputes later. This document can set out responsibilities for each child, the overall business structure and how shares will be distributed.

A financial planner can help you prepare for a tax-efficient transition. For example, a gift of shares can be considered an “asset transfer”, which can incur a capital gains tax (CGT) liability. One option could be to make use of gift hold-over relief. This way, the recipient (e.g. your child) could defer the gain until they dispose of the shares. This might occur during a later tax year when your child perhaps occupies a lower income tax band (resulting in a lower CGT rate); or, when they enjoy more of their tax-free Annual Exempt Amount for CGT.

Be especially careful with inheritance tax (IHT) when building an exit plan. Remember, gifting shares can trigger an IHT liability if the gift is regarded as a “potentially exempt transfer”. Here, the 7-Year Rule applies, which makes the gift liability to IHT (at a gradually tapered rate) if the original owner dies within seven years of making it. In this scenario, your beneficiaries (e.g. the person who received gifted shares in the family business) must pay it.

Amidst all of these considerations is Business Relief, which can exempt certain family business assets from IHT. However, this relief cannot be claimed if the business is already sold. This is another reminder to plan your estate, business financial plan and succession plan ahead of time, to ensure minimal disruption and needless wealth erosion.

Invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585
info@casfin.co.uk