Succession planning makes for a smooth and tax-efficient exit – Juliet Barker & Kirsty Bell

Juliet Barker is an Associate, Turcan Connell.

There are a number of different aspects to take into account when establishing your business succession plan. It’s important to consider practical, personal, legal and tax matters to protect and enhance your interests.

As an owner, the options available for an exit are determined by a number of practical matters such as your cash needs, your age, health, timescale, family circumstances and who is actually available and trusted to take the business forward. The tax and succession issues are also key, so taking a longer-term approach to planning will help your success to be as smooth and as tax-efficient as possible.

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Whatever your position, the main options for an exit are going to be: dynastic succession (ie involving one or more family members), an employee or management buyout or a sale to a third party.

If you have family members who are willing to take the business on, you should ensure that they are ready, with the right skills and experience, when they inherit your business. Key individuals, mentors and professional advisers should also be introduced at an appropriate stage. Once you are sure that the family is on board, there are a number of different ways of implementing the transfer. The most common are by way of gift, transfer to a family trust or a family buyout. The order of events is crucial, and can affect the availability of valuable tax reliefs, so must be carefully considered before the transaction commences. Take the time to become familiar with the tax requirements, and have a plan in place for funding a tax liability.

If a transfer to family is not possible then you could consider an employee buy-out. This does depend on having the right people in place, particularly if some or all of the purchase price is to be paid on a deferred basis. A typical way of achieving an employee buyout is by establishing an employee ownership trust (EOT). There are a number of conditions that apply to the trust and the trading conditions around the company but if these conditions are met, an EOT can have certain tax and succession advantages. You should take advice on the provisions of the EOT itself and the conditions that need to be met to help realize the benefits.

An alternative to an EOT is a management buyout. A common form of management buyout is the Vendor Initiated Management Buy Out, which can give the exiting owner control over the price, timing and identity of the successor owners. Again, there are tax implications, particularly in relation to deferred consideration and the continued involvement (or not) of the exiting owner which could be discussed pre-sale, to secure applicable tax reliefs.

Finally, you may decide to sell to a third party. This also requires detailed planning in terms of tax aspects but also in terms of getting the business ready for sale. This process should not be underestimated. A well-run and organized business will be attractive for a trade or finance buyer and it will make the sale process smoother for both parties. From a tax point of view, it is worth while considering both the sale itself and post-sale, as there may be a tax efficient way of dealing with the net sale proceeds.

It is also essential that your personal succession deeds, including Will and Power of Attorney, along with accompanying supporting documents are up to date and can facilitate a business succession plan in the event of something happening to you.

The key to a good succession and smooth handover is planning and communication. Consider what you want to do well in advance of a proposed exit, obtain appropriate legal and tax advice and make sure the people you intend to involve are engaged in the plan. It is crucial that your wishes are recorded in writing and that there is coordination between personal and business advisers. By taking time to get the plan right your successful business can carry on after you leave.

Juliet Barker is an Associate, Turcan Connell. The article was co-written by Kirsty Bell, Senior Solicitor.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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