For the owner-manager of a family business, passing on ownership and control within the family may simply seem the natural course of events, a simple way to allow the family to continue to own and control the business you have been building up.
But without careful planning and preparation, passing on a family-owned business can involve pitfalls. Discussing and developing plans with the involvement of all the family can help work through the main issues and avoid unnecessary conflict.
Ideally you should start planning your exit from the family business at least a couple of years in advance. The longer you have the easier it is to decide the best approach, develop a successor and organise finances in a tax-efficient way.
Setting a planned retirement date can provide a useful deadline to work towards. You may need to reconcile yourself to the idea of stepping back from the business. Although there may be a temptation to continue offering advice or to stay on in some role, this can undermine your successor.
Financially, you need to assess your requirements and how you will extract capital from the family business. Depending on the circumstances the business might need to borrow, or sell assets, to allow you to withdraw funds. You will want to take advice on the most tax-efficient options. Remaining heavily invested in the family business after retirement is a high risk strategy and increases the temptation to interfere.
A family succession is only a possibility if someone within the family is willing to take it on. You’ll also need to groom your successor, making sure he or she has the right skills and experience. As well as the traditional route of working up through the company, you may want to consider management training, stints in other businesses and so on.
Splitting management responsibility – for example, among several children – is rarely a good idea. Instead, you might need to consider options such as splitting the business into separate companies.
It’s worth bearing in mind that you can retain family ownership of the business while bringing in external management. While family-owned businesses can take a long-term view, they can also lack new ideas. Restricting management control to the family may also demotivate other employees and make it difficult to attract talent.
You may want to split ownership of the family business between several family members. You should think through the different priorities different individuals may have – for example, drawing an income as a passive shareholder or building up the business. A suitable shareholders agreement can be one way of anticipating and dealing with differences.
The transfer of ownership should be planned in a tax-efficient manner, taking into account issues like Capital Gains Tax (CGT) and inheritance tax (IHT). You may also need to consider how to look after the financial interests of both your children and your spouse. A suitable trust may provide a solution.
Before deciding to remain a family-owned business, you should consider whether this is the right option for your family. Unless the family has substantial other assets, family ownership may represent an unacceptable concentration of risk. Retaining full ownership may also constrain the finances of the family firm, limiting its ability to exploit opportunities.
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