Family business owners – exit strategy, management succession and estate planning

How to avoid the pitfalls by Ian Riggs, Partner, Hill Dickinson

Family business owners – exit strategy, management succession and estate planning

The manufacturing sector makes up approximately 5% of all family-owned businesses in the UK, making the issues of exit strategy, management succession, and estate planning crucial considerations for a large number of sector businesses.

Ian Riggs, Partner Hill Dickinson

Family business owners when considering their exit strategy have a number of different, potentially conflicting, factors to consider. What is the right thing to do for the business may not be seen as a right thing for their family or the next (successor) generation.

At the recent events and seminars, a number of family business owners described succession planning as the most important challenge they face and agreed that it is never too early to be considering all the issues and to be planning their succession.

Can management succession be the exit strategy?

Family business owners will need to assess whether a succession – related deal can deliver the value to which they aspire in comparison to the value which may be derived from a sale to a trade buyer.

A succession related deal may or may not be the right deal for the business as a whole and the question arises as to whether the ‘next generation’ family member(s) have the requisite skills/abilities to continue successfully the relationships which the business has with its customers, suppliers and its employees. Consequently, as part of this process, will there be a need for a non-family member to be brought into the business alongside the ‘next generation’ who may be able to plug any skills gap. All of these questions can lead to tension in the family which can be managed through the use of professional advisers. Communication at as early an opportunity as possible is key – if the members of the family all understand the succession plan, they have the opportunity to raise any issues which the principal members of the family are still able to address.

Agreements on the succession and general administration of family businesses are sometimes captured in so–called ‘family constitutions’ which can be useful in managing the competing interests from the different family members and providing direction to the next generation. Financial and legal advisers, if brought in early enough, can also become an important part of the process and can assist in developing a timescale for such exit strategy and management succession. Advisers can also be used as a sounding board and can provide reassurance to the various family members who may not be familiar with corporate transactions and the requirements of any funders or investors who may be involved.

Estate planning and management succession – two sides of the same coin?

It is vital to put in place an estate plan in order to take into account the impact of taxation, the need to support the present generation, how to provide for members of the successor generation and asset protection generally.

Once the future ownership and direction of the business has been determined, the will(s) of the family owner(s) and their spouses should be reviewed. For example, trusts can offer a significant amount of flexibility and can be an effective shelter from both IHT and also spouses and creditors of potential beneficiaries.

As with timing when considering the question of exit strategy, it is never too early to plan succession especially when adverse events and circumstances may occur at any time and upon short notice. The worst possible time to be planning succession is in the event of a key figure such as a majority shareholder or managing director of the business being incapacitated or dying unexpectedly.

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