Succeeding at Succession in Family Business

Family businesses are the backbone of the UK economy, employing millions and contributing significantly to regional growth and giving a sense of community identity. Yet the transition from one generation to the next can be fraught with complexity. The two key objectives – liquidity and preservation of the business legacy appear to be in conflict – how can you get cash without selling up? A sale to a trade buyer may be unattractive if the plan is to keep things in the family and this is where a purchase by family members (a “Succession Buyout”) is an increasingly viable and popular alternative.

What Is a Succession Buyout?

A Succession Buyout is a planned, often management or family-led acquisition of the outgoing generation’s shares. It can be funded through a mix of bank debt, company profits (via buy-back) and deferred consideration. The aim is continuity of ownership within the family or key management while providing fair value to the sellers. Typical steps include valuation, heads of terms, tax structuring, due diligence, funding documents and sale and purchase agreements, followed by governance updates and post-completion integration.

Understanding Family Dynamics

Families ought to know one another pretty well. They know about personality traits or past circumstances giving rise to unusual levels of loyalty, or even resentment, or jealousy. These emotions can surface during the transaction. For example, sentiments like "Dad always preferred you" can arise. It is essential to approach these situations with sensitivity and ensure everyone feels heard. This approach fosters a smoother transition and maintains family harmony.

Professional Valuation Matters

A professional valuation of the business is vital, especially if your shareholder or partnership agreement does not provide comment on this. An independent assessment ensures fairness, which is key to a successful transaction and maintaining positive family relationships. Both buyers and sellers want to avoid future regret or suspicion, making a fair valuation indispensable.

The Role of Trusted Advisers

Engaging truly independent advisers, both legal and accounting, can greatly aid in communication amongst the family. While individual family members can seek separate advice, it's often more effective to choose an adviser with a proven track record in handling family business deals. Such advisers can manage emotional pressures and ensure all agendas are considered, working towards a solution that benefits the entire family.

By focusing on these aspects, families can navigate the complexities of business succession with greater ease and success.

Planning for Succession: Why it matters

Succession planning is not just about share transfers. It blends governance, tax efficiency, funding, employment and estate planning. Starting early allows families to agree guiding principles, reduce surprises and preserve value. A well-structured plan can balance competing aims: liquidity for the retiring generation, opportunity for the next and continuity for the business.

Tax Planning Essentials

It is really important to consider the tax and financial affairs of the whole family, up and down the generations and a buyout is an opportunity to consider these things holistically. Has the family provided for everyone as they intend and have they done inheritance tax planning? Again, these are things that need to be done early. One of the consequences of some buyout structures is that IHT planning becomes more important – don’t leave it to the end.

Sills & Betteridge have been supporting OMBs/SMEs across Lincolnshire, Yorkshire and the East Midlands since 1759 throughout their full life-cycle, with many of our family business clients now at fourth and fifth generation stage. We understand what makes family business owners tick, their commercial and personal drivers, what they want to see from their legal advisers and how to tailor and deliver pragmatic and commercially focused legal advice to them with a highly personable and committed approach so they receive the best possible experience.

For an informal chat to discuss any ways in which we might be able to help put your family business ahead, please contact James Conduit, Corporate Partner, on 01522 542211 or JConduit@sillslegal.co.uk