Business owners urged to think about the future

Running a business requires huge amounts of dedication, energy and resourcefulness. The day-to-day pressures can sometimes seem overwhelming but ultimately company owners can benefit from a great sense of personal achievement and financial reward.

But what happens when the owner of the company leaves the business by either choice or circumstance? How will it continue to function, who will manage it and who will be the new owners?

All of these questions can be answered through effective succession planning. All scenarios can be planned for whether the owner exits through choice, early death or retirement.

However, despite today’s challenging economic climate, many businesses do not have adequate succession planning in place.

There are two separate elements to successful planning. Firstly there is the commercial side. We find that many partnerships still do not have written agreements and companies only have the simplest form of articles.

The second issue is how the company or partnership issues interact with the owners personal circumstances. Again, many owners have outdated personal Wills which combined with a lack of financial planning can make worse and problems can arise not just for business owners but also their families.

We therefore advise that forward planning is required to ensure successful transition on retirement. This is especially the case where a next generation of family or tier of management is taking over the helm.

It is therefore sensible for every business to plan for unexpected events to ensure the successful future of an organisation. Preparing what we call, a ‘company Will’ is of the upmost importance particularly when planning for the unexpected.

Businesses need to know that partners and shareholders have no automatic rights to buy out minority interests, even at a fair value, should a problem arise or someone needs to leave. Equally though a minority has no automatic assurance that their business interests will be bought and whether they will be offered a fair price.

It is therefore in the best interests of a business for proper buy/sell mechanisms and valuation arrangements to be put in place. These could include the option for other shareholders to acquire shares on the death of a shareholder offering a clear solution on premature death. It is important that the option documentation is properly thought through so that it can be funded from the company’s own resources or via life insurance.

Business owners also need to be aware of personal wealth issues that they might have to contend with if they have not effectively planned for succession. Thinking about your personal wealth at the same time as the company issues is just as important. Effective Will planning can mean that the value of your company is preserved for your children, whilst at the same time ensuring your surviving spouse has the benefit during his/her lifetime.

This can be done in a number of ways. There is still the option of setting up trusts during your lifetime into which you transfer your business assets. For private companies this can be relatively straightforward providing your accountant is happy that your business qualifies for what is known as “business property relief” (“BPR”). BPR allows certain assets to be transferred without paying inheritance tax when normally the value of them would mean a substantial tax bill. Property interests and partnership interests can also be transferred but the tax treatment can be more complicated.

For planning during your lifetime it is also necessary to consider the capital gains tax “Entrepreneurs relief” which the government extended considerably earlier this year (when they increased the headline CGT rate to 28%). Early planning can allow shares to be transferred to other family members in order to maximise the reliefs allowed.

When it comes to your Wills then the dual consideration here is that with an effective and well written Will you can (i) ensure (as far as is possible with legislation) that the value of your company is not subject to tax at 40% on the death of either you or your spouse (ii) plan so that your surviving spouse has the ability to benefit from the income during their lifetime and (iii) ensure that the capital is protected for your children.

Finally, if no nomination is made or a spouse is nominated to receive a pension lump sum then the funds can be subject to an inheritance tax charge when passed onto the next generation. We work closely with accountants and financial advisers to avoid these problems.

If you have any questions about the succession planning for you or your business contact Greg Dixon on 0113 227 0355 or email greg.dixon@gordonsllp.com.