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Keeping it in the Family?
It is important for all family businesses to plan for succession in its widest sense. What will happen to the business when the current owner retires? When is this likely to happen? And what preparation is needed to allow the transition to occur with minimum disruption to everyday operations?
John Biggar and Anne Marie Renz prescribe caution and early attention to this important part of a company's business plan……
THERE ARE complex issues surrounding the subject of succession-planning. Take, for example, a family-run hotel. If the current owner has grown-up children it may seem an obvious strategy to pass the business on to them. However, if the successors are not interested in active involvement with the hotel, it might be better to engage external management to develop the business while the children own it as an investment. Or, alternatively, it might be preferable to sell the hotel to a trade purchaser. This would provide the owner with funds for retirement, and any excess wealth could be transferred to the children through lifetime gifts and/or will bequests.
If, on the other hand, the children are interested in the business, do they have the necessary skill, drive and commercial acumen to lead the business for the next generation?
And if some descendants are interested in the business and others aren't, how do you ensure that each child ultimately inherits a fair proportion of their parents' estates?
The question of timing is key. Owners can be reluctant to relinquish control over the business for a variety of reasons and the current tax system, with the tax-free capital gains uplift on death and 100% business property relief, encourages owners to retain assets until their death.
However, the business needs to maintain momentum. Is it time to consider the development of a new restaurant or leisure club, or perhaps a more straightforward re-branding exercise? The children have to be motivated to think long term, so there could be pressure to pass on the business during the current owner's lifetime which will inevitably have emotional and tax consequences. If it is not appropriate to hand over ownership and control at the same time, trust structures can be used to achieve a separation of the two. If there is to be no family succession then it is best to identify this as soon as possible. The owner can then consider how and when they will exit the business – perhaps by a trade sale or via a management buyout. The important point is to recognise that the business should be in good shape to maximise the eventual sale price. Only when the business strategy has been considered and developed will it be appropriate to look at the details of inheritance tax planning and will drafting. Inheritance tax on the transfer of a business will not usually be an issue, given the availability of 100% business property relief on most business assets, but consideration must still be given to the family home and other significant investments. Ultimately, the overall plan should balance inheritance tax planning with the individual's need for financial security during retirement, and still allow sufficient flexibility to cope with unexpected events. All in all there is much to consider when it comes to successionplanning, and it is better for the business if the issues are identified, discussed and managed well in advance of any change.
For specific advice and assistance on any of the above issues, contact John or Anne Marie on 0131 656 2000 or visit www.todsmurray.com
This article has been edited from its original version. For the complete feature, please see Catering in Scotland magazine November/December 2008.
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