Business succession - passing your business to a family member

Having expended a huge amount of energy (and, frequently, invested a large amount of cash) in a business, it is only natural that many entrepreneurs wish to have some say in what happens to their firm after they retire.

While most do not wish to continue in a day-to-day management role, a significant proportion would like to be able to decide who takes the reins after they leave. Family succession is one of the most effective means by which this can be achieved.

Passing your business on to a member of your family enables you to keep some sort of involvement in the firm (which can be particularly beneficial if you have become a ‘figurehead’ for the company) and has the added advantage of enabling you to pass on assets to your family.

Is family succession right for me?

Family succession is not the right option for every business owner. In the first instance, you must have an obvious successor. As much as you may wish to keep your business under family management, you must make sure that you properly consider the wishes of any potential successor.

Primarily, you should ensure that the proposed individual actually wants to take over the business. It is not uncommon for proposed successors to feel pressured into taking on a job that they do not actually want, particularly if the idea has been mooted for some time. As well as causing personal problems, shoehorning someone into a position they do not wish to fill will have negative repercussions for the business as a whole.

Similarly, you should ensure that your chosen successor is properly qualified for the job. It does not necessarily follow that, because they are a member of your family, they are the best person to take over the company. There may be someone else already in the organisation better qualified to take over from you. If you are seen to pass your firm onto a family member at the expense of a better candidate, you are likely to cause friction within the company.

Tying up loose ends

Having found a willing and suitable candidate to take over from you, there are a number of practicalities that must be considered. It is always best to seek independent legal advice when exiting a business; there are a number of dedicated exit strategy advisers who will be able to guide you through the process.

It is worth speaking to a legal professional even if you think your affairs are relatively simple. That said, there are several things that particularly apply to cases of family succession.

To begin with, you must come to terms with the fact that you will no longer be involved in the running of the business. This can be difficult, particularly if you intend to continue drawing an income from the firm. There are a few possible ways of combating this.

Depending on your circumstances you could, for example, arrange for your successor to buy you out. However you achieve it, you must accept that you will no longer have any official say about the running of the company. Failure to acknowledge this often results in family tension and damage to the firm.

It may be, however, that you intend to maintain some role in the company – perhaps on a consultancy basis. Any such plan should be clearly detailed in advance in order to avoid confusion. You should also make sure that your successor is happy with your intended role.

Think about tax

There are potentially significant tax implications for family business succession. The biggest risk for those exiting a business is Capital Gains Tax. As of April 2008 Capital Gains Tax (CGT) is charged at a flat rate of 18 per cent.

If you are divesting yourself of your shareholding in the business, and that shareholding has increased in value since you acquired it, you will incur CGT. The only exception to this is if you are passing the business on to a spouse or civil partner; such transfers are exempt from CGT.

However, the April 2008 changes to the tax schedule also included the introduction of so-called ‘entrepreneurs’ relief’. Under these rules the first £1 million of gains will be taxed at a rate of 10 per cent. Any gains over this amount will attract the regular 18 per cent rate. You should always seek advice from a tax accountant before divesting yourself of a holding in a business.

Passing your business on to a relative can be an effective way of ensuring that the profits of your endeavours can be enjoyed by your family, and that the firm will remain under the control of people you trust. But family succession is not the right option for everyone; you should think carefully about other options, as well as the potential tax implications, before agreeing to exit your business in this way.