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It is a fact that only 24% of UK family businesses survive to the second generation, and only 14% beyond the third.
Too many families fail to plan properly for the business to pass to the next generation, with the result that it has to be sold. Often it is difficult for the founder to accept that they will not always be around to look after the business, or they may find it difficult to choose between their children, or doubt their son/daughter can cope.
But nobody is immortal; change is inevitable. What is important is to plan for that change.
Most businesses have a business plan, but you should also review:
- Whether you have sufficient income to maintain your standard of living in retirement.
- Have you brought in and developed your children or managers to run the business?
- Have you a clear strategy for passing on the ownership?
You should plan to extract profits to build up assets outside the business to fund your retirement.
Careful tax planning can ensure that the minimum is taken by the tax man, so that your children are not burdened by a significant Inheritance Tax bill which will burden the business and their lives for the next several years.
In the worst case, it can mean that the business has to be sold to pay the bills.
Trading businesses may qualify for 100% business property relief for Inheritance Tax purposes, which offers considerable scope for tax savings.
Where you think you might wish to treat your children differently, it may be possible to transfer different assets, such as property investments or the business, into separate companies owned by the children so that some have the investment income and others take the trading risk.
Or different classes of shares can be used to separate ownership of the capital and income from voting or management control.
But it is important to ensure that the interests of all members of the family are protected.
You may need a new Partnership or Shareholders Agreement, to amend your Articles of Association, or to make new wills.
One reason why family businesses fail properly to plan for succession, is because it all seems too difficult and complicated.
It has been said that planning the succession of your business feels like planning your own funeral, only not as much fun!
Our experience is that it is best to think about it at an early stage. Use experienced family business advisers to establish what is possible.
They can help guide you through to a solution which meets your and your family’s needs. Generally we recommend that you discuss the options thoroughly with your spouse or partner and children.
Where appropriate you should include other family members and senior management – the latter often have a valuable perspective and a vital role to play in the process.
There is a lot to think about, but family businesses should plan ahead and work with experienced family business advisers, who can use their knowledge of what has worked for other families to help you pass the business on and for the business to survive and thrive.
Richard Coombs