Monday, August 8, 2022

Succession plan ensures smooth and tax-efficient exit – Juliet Barker &…

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As a family business founder or entrepreneur, you’ve put a lot of time and effort into getting your business off the ground and making it successful – but what happens when you want to get out?

There are various aspects to consider when planning your company succession. It is important to consider practical, personal, legal and tax matters to protect and advance your interests.

As an owner, the options available to exit are determined by a number of practical factors such as: Tax and succession issues are also key, so longer-term planning will help ensure your exit is as smooth and tax-efficient as possible.

Whatever your position, the main exit options will be: dynastic succession (i.e. involving one or more family members), an employee or management buyout, or a sale to a third party.

If you have family members who are willing to take over the business, you should make sure they are ready with the right skills and experience when they inherit your business. Key people, mentors and professional advisors should also be introduced in due course. Once you are certain that the family is on board, there are a number of ways to proceed with the transfer. The most common are gifts, transfers to a family foundation or a family takeover. The order of events is critical and can affect the availability of valuable tax breaks, so careful consideration must be given before beginning the transaction. Take the time to understand tax requirements and create a plan to finance a tax liability.

If a family transfer is not an option, consider an employee buyout. However, this depends on having the right people in place, especially if the purchase price is deferred in whole or in part. A typical way to achieve an employee buyout is to set up an Employee Ownership Trust (EOT). There are a number of conditions that apply to the trust and trading conditions surrounding the company, but when these conditions are met, an EOT can have certain tax and succession benefits. You should seek advice on the terms of the EOT itself and the conditions that must be met in order to realize the benefits.

An alternative to an EOT is a management buyout. A common form of management buyout is the seller-initiated management buyout, which can give the exiting owner control over the price, timing, and identity of succeeding owners. Again, there are tax implications, particularly in relation to deferred consideration and the exiting owner’s continued participation (or non-participation), which could be discussed prior to the sale to ensure applicable tax relief.

Finally, you can decide to sell to a third party. This also requires detailed planning with regard to tax aspects, but also with regard to preparing the company for sale. This process should not be underestimated. A well run and organized company will be attractive to a commercial or financial buyer and will make the selling process smoother for both parties. From a tax perspective, it’s worth considering both the sale itself and the post-sale, as there may be a tax-efficient way to deal with the net sale proceeds.

It is also important that your personal succession deeds, including a will and power of attorney, along with supporting supporting documents, are up to date and can facilitate business succession planning should anything happen to you.

The key to a good succession and smooth handover is planning and communication. In advance of any planned exit, think about what you want to do, get proper legal and tax advice, and make sure the people you want to involve are involved in the plan. It is crucial that your wishes are recorded in writing and that personal and business advisors coordinate them. By taking the time to create the right plan, your successful business can continue after you leave.

Juliet Barker is an employee of Turcan Connell. Article co-authored by Kirsty Bell, Senior Solicitor.

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