Tips for Passing Your Family Business onto the Next Generation

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Tips for Passing Your Family Business onto the Next Generation

This is a guest post by Jeff Barber, Partner at Selling My Business

After years of working hard and building up your business, you may have decided that it’s time to move on, but what should you do with your business? Should you sell it outright to a third party, or could you pass it on the next generation, giving them the security of a good job in a successful business.

If passing your business on to family feels like the right choice for you, then there are a number of considerations to take into account to ensure that the process goes smoothly.

Is passing your business onto the next generation really the right option?

The first thing to do is to sit down and think about whether this is the right choice for you and your family? Do your offspring really want to work in the business or do they simply feel obliged to do so? And can you honestly say that they have the right attributes to continue to make it a success? Also if you wish to pass it on to more than one family member, are their relationships strong enough to ensure that they will be able to work together effectively as a team?

If you are concerned about any of these points, then maybe simply selling your business and dividing the profits amongst your family members could be a better idea?

Different methods of passing your business on to the next generation

So if you have decided that passing your business on to the next generation is the right option for you, then there are a number of ways in which this can be achieved:

Phased share purchase – this will allow your family to slowly purchase your shares as their funds become available. You can either stagger selling your shares directly to your family members or they can be sold in one lump to the company and then bought by your offspring from there.

Family Buyout – if your family members are able to raise the sufficient capital then a Family Buyout works in a similar manner to a Management Buyout.

Gift your shares – to give your family members a further financial boost you may wish to simply transfer your shares to them free of charge – again this can be either phased or in one lump sum.

Tax considerations when passing your business onto family members

Although passing your business onto the next generation may feel like the ultimate in altruism, if it’s not handled correctly then it can result in some significant tax implications. For example passing a business onto family members could result in both you paying Capital Gains Tax and your family then paying Inheritance Tax. However there are a number of tax relief schemes that could be employed to avoid some, or all, of this:

Entrepreneur’s Relief – By claiming this you can reduce the amount of Capital Gains Tax that you pay upon the disposal of your business down to 10% for the first £5million. To qualify you must hold at least a 5% stake in the business and have been involved in it for a year or more.

Business Relief on Inheritance Tax – Through this scheme you may be able to claim 100% relief on Inheritance Tax on the value of a business, or an interest in it. Or you can claim 50% relief on shares controlling more than 50% of the company or on any other assets such as land, buildings or machinery. This relief is only available if the business is kept as a going concern until the death of the owner.

Successfully and profitably passing your business on to the next generation can be both rewarding and financially complex, therefore we believe that getting the advice of a business sales specialist or accountant is essential.

Jeff Barber is aPartner at Selling My Business. Jeff has over 30 years’ experience in corporate finance and has successfully advised on well over 100 business sales, working with everything from start-ups to £100m+ MBOs.

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