Succession Planning for Business Owners Part 2 – Issues to Consider
When owners of a business are looking for an exit, there are a number of considerations:
- Who may buy the company?
Will it be a trade sale, management buy-out (MBO), restructure, company buy-back of shares, employee ownership trust (EOT) or other share incentive scheme
- Is my house in order?
Ensure that any issues or potential issues that may concern a purchaser are addressed
- Who are my advisors?
Both tax and legal advice is required and it is important to get the right team in place as early as possible
- What is the value of the Company?
Your financial advisors will assist here but it is important to be realistic about the price you are seeking to achieve, balanced against what you require to retire or move forward with new plans
- What financial/tax planning do I need to undertake?
Your tax advisors will be crucial here as the exit route you take may well be influenced by the tax consequences and reliefs available
- Are my key employees/management team incentivised?
If looking at a trade sale, ensure that key employees are not going to leave and consider the use of management incentive plans
Our previous blog entitled Succession Planning for Business Owners – Part 1: Some Exit Options https://rb.gy/6jsw66 discusses some of the exit options, in particular, a company buy-back of shares, a management buy-out and an employee ownership trust.
Other considerations and planning required before determining an exit route are as follows:
- Restructure the shareholdings
You may look to transfer shares to a spouse or children or a family trust prior to a sale. Tax advice should be taken to ensure that a business owner would qualify for entrepreneurs’ relief on a sale, which is 10% tax rate as opposed to the higher CGT rate.
- Reorganise the company/group
If the company holds property of shares that the seller wishes to retain, a demerger can be used to extract assets in a tax efficient manner. A demerger can also be used to separate part of the business, so that part can be sold and part retained. This does require early planning and appropriate tax clearance so needs consideration well advance of a sale.
- Management incentive plans
Consider ways to lock in and incentivise managers and key employees with the use EMI schemes, Company share option plans (CSOP) and growth shares. It is important to consider this well in advance and to get clearance where necessary.
- Sale Proceeds
Another consideration will be how the consideration will be paid, ie. cash on completion, deferred consideration, loan notes, earn-out provisions and consideration shares in the Purchaser. There will be different tax treatments and tax will be payable at different times dependent upon the consideration, so early tax advice is advisable. One of the effects of COVID is likely to mean that more sellers will need to assist sales by accepting deferred consideration from a purchaser.