Succession planning for a smooth business exit

The important thing is to have a succession plan in place and an orderly exit for when the day comes, to ensure business continuity, long term success and to ensure that you are boosting business value. Succession planning is key to ensure smooth transitions, for more information on succession planning with a key focus on Inheritance tax, click here.

Before making these considerations, it is important to consider your end goal as to what you want to realise out of the business.

Your succession options

• Passing on to family members – It may be the case that you have family members that you intend to pass your business on to.
• Management buyout – A management buyout (MBO) is one approach that has gained traction for its flexibility and the ability to leave your business knowing that an experienced team is in place to run it. An MBO involves the existing management team of your business, whether that be a single director or the entire team, buying the business from you and continuing to run it.
• Selling your business to a co-owner – In cases where there are multiple business owners, one option is to sell ownership to a co-owner. For some succession plans, this could go into effect when the co-owner passes away, retires, or otherwise needs to step back from the business.
• Selling your business to an external party – This could involve selling to an investor, a competitor, a management firm, or other interested party.

How an Employee Share Plan can help with succession?

• Whichever succession route you are considering, we would recommend looking at implementing an Employee Share Plan as part of this succession plan. We have seen this work in practice as an effective way to prepare key members of staff.
• Whether you’re considering selling the business, passing it on to a successor, or even retiring, ensuring that your key employees are on the same page and aligned with your vision for the future of the business is essential.

As well as incentivising staff by giving them a share of the business, it also gives them a sense of ownership and ensures real commitment to the business’s long-term success. Particularly when thinking about your succession plan, an Employee Share Plan helps the transition of leadership as you can gradually transition it to your key employees who are familiar with your business. This greatly helps to reduce risk and any disruption during the transition period and ensures business continuity and success following your exit. It is important to note that an Employee Share Plan can be structured gradually so that the transition takes place over time, depending on what your circumstances are.

Tax opportunities on your exit

With family succession planning, there are multiple options to facilitate handing onto the next generation, and there are a few tax implications to consider. Usually, it is possible to hand on your shares without too much tax cost, but it is also likely in those scenarios that you will be relinquishing your equity, and not necessarily realising the value of this yourself.

Where there are already multiple directors/shareholders of your business, the other shareholders may want to buy you out of the company when it comes to your exit. It is important that this is done tax-efficiently. There are various ways of buying out a business partner/shareholder but predominantly the main question is how to fund it? The usual routes for financing the buyout often include selling personal assets, borrowing from family and friends and personal savings. All of these ways come with high tax costs to achieve. However, if your company has a healthy cash flow and is generating profits, there is a way to use these company funds to finance the buyout.

If structured correctly, a buyout can be very effective and tax efficient using company rather than personal funds as finance and can apply to buying out a co-owner, or a management buyout. Structuring in this way using company funds is often the only way that the remaining shareholder(s) can afford to buy the leaver’s shares.

Selling your business to an external party is a significant event, and it is important you have the right advisers to help you do this and maximise the value and outcomes. There are certainly many tax implications and opportunities when selling your business, but the key is to plan ahead. You really need to be thinking 2-3 years ahead of sale as a minimum, in order to capitalise on your opportunities and plan for a successful sale.

The above strategies can be an effective way of ensuring a smooth transition when it comes to you exiting your business but ensuring the continued success of your business. Tax affairs are complicated, therefore, to ensure the most tax-efficient route regarding your succession plan, we recommend speaking with a professional adviser.

SUMMARY
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Please note: This article is provided for information only and was correct as at time of writing (03/10/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.