Business succession planning - your options for emotive issue explained: Alistair Scott-Somers

Here are a number of succession planning options, based on whether the owner wants to crystalise the business value or keep it within their family for the benefit of future generations.

Keeping it in the family

Naming a family member as a successor retains the business value, as well as the possibility for some influence over the business for the retiring owner, if desired. However, this option does not provide them with the opportunity to realise the value of their business and de-risk their investment.

It also requires careful consideration, in terms of how to structure this fairly and in the interests of all the family members, so it’s advisable to consult a legal adviser to help facilitate this.

Selling the business

If the business owner doesn’t have a suitable candidate for succession within the family, then there are three main options available to them.

Management buyouts

Management buyouts (MBO) or vendor initiated management buyouts (VIMBO), are an opportunity to sell the business to those involved in its value creation.

An MBO is when the senior management team acquires all or part of the company, generally by raising third party investment or debt. VIMBOs are where the founder specifically approaches the existing management team about buying the business and these are commonly funded via cash on the balance sheet and future earnings.

A MBO is typically more complicated, generally involving third party debt and/or private equity and therefore usually more personal risk for the founder and management. However, the founder may achieve a higher price than via a VIMBO, which generally keeps third parties from investing in the business.

Sale to third party

There is then the option of selling the business to a third-party such as a competitor, supplier, or customer.

Any third-party buyer will conduct a detailed due diligence on the historic and current performance of the business, as they will be paying a higher price than any management team. Anyone looking to sell their business in this way would be strongly advised to consider pre-sale tax planning and to prepare the business for sale.

Employee Ownership Trusts

The third option, which is a relatively recent development, is the sale of the business to its employees via an Employee Ownership Trust (EOT). This involves the sale of more than 50 per cent of the shares to an EOT which holds the shares in trust for the employees.

Two key benefits of this option are that it rewards loyal employees while allowing the founder to pay no tax on the sale proceeds. However, it’s only appropriate for businesses with a strong second tier management team ready to step up. There are also a large number of HMRC requirements to be met in order to qualify for the beneficial tax treatment, so legal and tax planning is imperative.

Similar to a VIMBO however, it can be a low-risk way to crystalise the value of a business. The departure of a business founder can be a massive risk to an organisation’s future stability and profitability, so it’s never too early to consider succession planning, not only in relation to retirement

but also in the event of death or serious illness.

A strategy for an orderly transition of management and ownership should therefore be an integral part of all business plans.

Alistair Scott-Somers is General Counsel and Director of Progeny Law & Tax