Selling a family business
Updated: 26th September 2016
Family businesses are unlike any other organisation. Key decisions need to be considered from an emotional point of view, just as much as they are financial. And this is never more evident than when it’s time for a change of ownership.
When one generation feels it is time to exit or scale down their involvement in a company, there are two options to consider: passing it on to the next generation, or selling it to a third party. And these options definitely require careful consideration - it is not enough to assume that the next generation will, or won’t, automatically want to continue the family legacy.
Passing the business onto the next generation
In cases where the next generation is qualified, able and willing to take on the family business, it can either be sold or gifted. And you can do so equally among family members, or match shares to level of day-to-day involvement.
It’s best to discuss and decide the ideal outcome well in advance of it needing to come to fruition. This gives you opportunity to give the the decision the proper care and consideration it deserves, as well as preparing the organisation and individuals for their new roles.
Selling enables the current owners to pursue their next goals, whether that’s a new enterprise, retirement, or something else. There’s also the consideration that a business which has been gifted can be viewed differently by the recipient than one in which they had to part with their own money to pay for.
When selling the business to the next generation, beware that you may then be liable to Capital Gains Tax of up to 28% on property and 20% on everything else, and this takes into account the ‘open market value’ of your business, even if you sell at reduced family rate. Advanced planning, including taking advantage of Entrepreneurs’ Relief, can help significantly reduce your tax bill, so talk to a business advisor early to avoid paying more tax than is necessary.
Even gifting the business has serious tax consequences, as Capital Gains Tax can still apply in some cases. In addition, Inheritance Tax will apply if the business is handed over on the death of the owner, or if the death is up to seven years later. While this can be mitigated somewhat, IHT currently stands at 40% on estates over £325,000 so early planning with a business advisor is crucial to avoid nasty surprises from the tax office.
Selling a business to a third party
There are many reasons a family may sell a business rather than hand in on to the next generation. As much as it’s a romantic ideal for a company to build a legacy over decades, even centuries, it requires a lot of skill, hard work - and most of all, luck - to become a reality.
The decision to sell is huge, and is fertile ground for family disagreements.
Before a sale is imminent, it’s advisable to hold a discussion with all family business stakeholders to decide which circumstances would trigger a sale. That may be an offer above a certain amount, achieving business milestones, or a death in the family. Having these conditions specified in advance, and reviewed every couple of years, will mean less chance of panic should a situation arise.
In addition, it may be that some family members sell their controlling shares while others remain, either as shareholders or as employees. Here, it’s vitally important to discuss details of the sale, buyer and acceptable terms. The legacy of the business matters much more when family members remain.
Once all the conditions of the sale have been agreed among family members, then comes the complicated matter of selling the business.
This is a lengthy process for even the most straightforward of organisations, often taking more than six months.
First the business needs preparing for the sale, including servicing machinery and property, maximising cashflow by calling in debts, selling unused assets and avoiding making nonessential purchases, and ensuring all licenses, leases, patents and contracts are renewed and up to date.
Potential buyers will look into all of this and more during due diligence, so once the business is in healthy working order, it’s important to prepare all documents ready for inspection, as well as readying for plenty of questions.
Whether or not you’ve already received an offer for your business, it’s always advisable to search for potential buyers. There may be others out there willing to pay more or agree to more suitable terms, or maybe interested parties will bid against each other and inflate your selling price.
It’s possible to advertise your business for sale, but be aware that this can cause uncertainty and upset staff, suppliers, customers and creditors. Businesses are best marketed discreetly, which can be done through a broker.
Once a buyer has been found and they’ve completed their due diligence, it’s time to negotiate a deal that meets your family’s agreed price and terms. A business advisor will be able to provide a realistic valuation of your company. This, dependent on your industry, will either center around the value of your assets, the potential for future income, or some combination of the two.
Your advisor will also be able to lay out terms that mean that as well as your business being disposed in a way that suits your needs, it is also done in a tax efficient method that ensures you’ll keep the biggest slice of the price paid.
The final decision will relate to whether the buyer wishes to keep you or your family members on board for a transitionary period or longer. As long as you’re suitably compensated, this can be an attractive proposition for both parties and will increase the chances of a successful sale.
Whether you choose to pass on your family business, sell it to the next generation or find an outside buyer, the selling process is lengthy, complex and mistakes can have heavy consequences, not only financially but on the happiness of your family unit.
Take time over decisions to ensure all family members understand the consequence ad the reasons. Seek the assistance of experts who will be able to employ experience, expertise and an outsider’s perspective to aid a smooth selling process. Whatever stage of the sale you’re at, contact BTG Corporate Finance for specialist advice and a free consultation.
Martin has nearly 20 years’ corporate finance experience specialising in advising owner managed businesses. Martin has considerable experience advising on business sales as well as management buy-outs and acquisitions across a wide range of sectors and deal sizes.