In this part of our Family Business series, we talk to three professionals about how to run a family business from the legal side
Get your property in order
Barry Frost managing director, Commercial Plus
The lease and mortgage of a premises must take precedent over everything else when you are transferring a business from parent to child.
I’ve seen so many people come to grief where they haven’t documented things properly. It’s important that you treat the transfer of a business from one family member to another like a standalone transaction. It needs to be treated with the same respect.
If the property is freehold then the mortgage/ownership of the property would be in the parents’ names and either you need to transfer just the goodwill of the premises or you transfer the property. When the bank originally lent money to buy the property, they were looking at it in isolation, run by Mrs A and Mr B. If they are retiring, the bank doesn’t want its security position weakened. So, if parents have kids of 17 or 18, who are going to university and have not worked in retail then the bank they would underwrite the deal as if it was a new deal.
In many cases it’s just the goodwill and mum and dad hand on to the property, especially if the freehold is owned.
Alternatively, if a property is leasehold it might have been in the parents’ name for 20 years and you’ve got to add in adequate time because from the landlord’s perspective, a young person with not much experience in retail might weaken the tenancy if the kids are taking over and the parents are disappearing. A recent example of the problems of not handling this well is where a son and daughter came in and took over the alcohol licence but didn’t tell the landlord that the family had retired. The landlord could claim that the children are not the legal tenants and that can put the business at serious risk.
To deal with this process in the best way possible, you need to give it time. Sometimes it’s not possible – if there’s illness within the family, for example – but given the opportunity you want to give yourself six months to a year to allow for all the legal issues – alcohol licences, ATM contracts, tax, asset finance – and seek professional advice. It pays to make a checklist.
In the end, getting this right is about the credibility of your business.
Get your succession plan organised
Fiona Graham, external affairs and policy director at the Institute of Family Business
Sometimes it can be difficult for family business owners to talk about retirement or succession, as these are very sensitive issues. Nonetheless, they are necessary to tackle. Some recent statistics show 43% of family firms do not have a succession plan in place. Planning succession in family businesses is a lengthy process that should start early on. While there is no ‘one size fits all’ model to plan succession, there are some common issues that are key to any family business, which I go over below.
Put a structure in place: Being at the same time a family member and a business owner is no easy task, and individuals within the family business system may have different needs and objectives. This is why defining roles and responsibilities, establishing good communication, thinking early on about the long-term objectives of the family business and planning accordingly is key to avoiding conflict and achieve better alignment between the family and the business.
Communicate whatever your family agrees: Once the appropriate governance structures are in place, ensuring these are well known and understood across the family business is key. As long as everyone understands who does what and why, you can prevent conflicts and ensure a smoother management of the family business.
Ensure younger family members can learn the business: Engaging younger family members from an early age is important for a smooth succession. Another recent report highlighted how many next generation members want to be provided with safe spaces to learn, communicate and develop, within the family business. This may involve work experiences in the firm, educational pro-grammes on issues like ownership and finance, or encouraging social and emo-tional engagement through family meetings and the family’s philanthropic activities.
Outside experience can be invaluable: It can also be extremelyvaluable for younger family members to gain experience outside the family business. This allows them to develop personally and professionally, and gain meaningful experience, which they can bring back to their business if they then decide to join. Giving such opportunities to the next generation is fundamental to ensure their voices are heard and their talents and passions are developed and properly deployed.
Ensure the current management is supported: Succession planning should not be only about the next generation. When thinking about the ‘whens’ and ‘hows’ of handing over the reins of the business, the current generation needs just as much support as the next. Giving current owners the right help is important to tackle these questions and foster positive family relationships.
Work out how older family members will be financially supported: Keeping in mind the differentiation between ownership and management is key when addressing the issue of retirement. Upon retirement, some owners effectively maintain ownership of the firm and take dividends, which guarantee their financial security even if they are not involved in the day-to-day management of the family business.
Your tax affairs need to be in order
Heather Britton, Tax director at PKF Francis Clark
Considering the financial implications of passing down a business can be emotionally difficult and stressful. Heather Britton, tax director at PKF Francis Clark, considers some key tax points to think about.
Handing your business over as a gift: Are you planning to gift the business to a family member or do you need an on-going income stream or capital to fund your retirement? If selling the business, can you lock into the low 10% rate for capital gains tax or can you gift with no tax charge? Tax advisers can help you work this out and getting it right can provide security and an income stream to both the younger and older generations. Some existing owners may wish to use on-going profits from the business to fund their retirement.
Are you a corporation? If you are higher rate taxpayers (taxable income of over £45,000 in the current tax year) then consider whether you would benefit from owning your business within a corporate structure. As well as companies paying a lower tax rate of 19% on on-going profits there is also the benefit of limited liability. For those reinvesting profits within the business there can be tax savings. Consider whether business premises will pass to the next generation or the impact of any lease as this may impact on the future profitability of the business and security of trading premises.
Reducing inheritance tax liability: Remember that inheritance tax may bite where a married couple have assets over £650,000, the excess being taxed at 40%. With the new residence nil rate band, some couples could have assets up to £1m by 2020 and pay no inheritance tax. There are reliefs available for business assets and it is key to ensure the business owners’ will is up to date. If a gift is made of the family business to one child then this can raise issues of inequality so it is key that family members understand the plan.