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Why managed succession to the family business makes financial sense Why managed succession to the family business makes financial sense

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Nov 17

Why managed succession to the family business makes financial sense

Written by Peter Greswold
Partner

DDI: 01423 726612
M: 07834 150431
E: peter.greswold@raworths.co.uk

The saying “rags to riches to rags in three generations” is not lacking in truth and it is often the case that the obvious exit for the owners of successful family companies is to sell out completely and live off the proceeds which are divided among the next generation in a manner that is obviously equitable.

However, selling the company is no longer a strategy that works as well as it might have done in the past. The simple truth is that the proceeds of sale will no longer generate the return that they would have done pre-2007 and the returns will certainly be nothing like the yield generated by a successful trading company.

In this context, the family company is very much the goose which lays the golden egg and no family should consider selling it without careful thought.

Passing the business down to the next generation has advantages; when a family company is engaged in a trade, the shares can generally be transferred to the next generation free of inheritance tax (IHT), whereas passing on the proceeds of sale will attract IHT at 40%. So, where there are individuals groomed to take over, handing down the business ownership seems logical. The problem is that quite often, the next generation are unable or unsuited to the role.

The successful transfer of family companies down the generations is a matter which requires considered attention years in advance. The current business owner may have to face up to the difficult task of sharing some home truths with certain family members who simply aren’t suited to working in the business. However, this difficulty is mitigated when it is made clear to the next generation that the ongoing structure should differentiate between management and ownership.

The fact that individuals, whether family members or not, are involved in the management of the business does not automatically mean that they are entitled ownership of it. Similarly, it should be made clear that owning shares does not entitle someone to assume an executive role in the running of the business. There are a numerous, successful family businesses in Yorkshire in their fourth or fifth generation, where few or indeed none of the directors are family members and this can work perfectly well.

No two family companies are the same, and indeed, no two families are the same, so there is no right or wrong way to deal with the questions of sale or succession, but it would be a mistake to think that a sale of the company is the first option to consider.

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