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Succession Becoming A Costly Affair For Many Family Firms

25th September 2013 Stuart Duncan

Considering the challenge of succession as the next generation have choices to make

You might think that the significant rise in the numbers of young people enrolling in higher and further education might be having an impact on the long term future of family businesses across the UK. Instead of learning the ropes within the family firm, the fact that so many of the next generation are now going off to engage in new experiences at university or college could, you might argue, signal an end to their wish to become involved in the family business and potentially create some real problems over succession.  

Certainly there is no denying the numbers which continue to rise. In the last 10 years alone, the number of young people attending university in the UK has risen from around 1.9m to nearly 2.5m. 

Despite the continued growth in these figures which, I know from anecdotal experience, include a rising number of young people linked to family businesses, it is not preventing them from succeeding their parents. Instead the younger generation are, in time, applying their new skills and experience to the family firm. 

Baxter’s Foods in the north of Scotland, founded in 1868, is a great example of this. Its current Chairwoman Audrey Baxter, has made a significant impact in building it into a global giant. Following university Audrey embarked in a career in merchant banking in London before returning to Scotland in 1988 to commit herself to the family firm. Baxters has gone from strength to strength in that time and continues to develop, acquiring three new businesses in the last two years and growing revenues by 10 per cent in the last 12 months alone to £170m.  

There are now new challenges emerging with family business succession. Many parents are now unable to simply gift it to their children, mainly due to the diminishing values of pensions and the fact that less of them can look forward to having a comfortable retirement provision in place. This means that the family business owner is now increasingly in a position where they have to sell or part sell the business to their children before they can afford to hand over the baton. 

While young people will, of course, want to ensure their parents have adequate resources to enjoy their retirement, the challenge for them is how they can acquire the family business in the most tax efficient and affordable manner. Putting a share buy-back scheme in place, whereby the children are given a small initial stake by their parents followed by a staged repurchase of the parents’ shares by their company, is an effective means of achieving this.  The buyback allows funds to go to the parents and although the parents will have made a disposal for tax purposes, this can very often receive favourable tax treatment if the parents are able to satisfy the conditions necessary for entrepreneur’s relief.  The overall effect of a buyback in such cases is that it reduces the parent’s holdings say over a 5 to 10 year period while at the same time increasing the percentage of the children’s shareholding by a proportionate amount.  All of this can allow for a smooth transitional handover of the business.   

Another possible way of achieving a succession plan might be through the demerger of a specific division within a family business which is either sold or, if it is an option, gifted to a family member. Again this can usually be done in a tax efficient manner, although it would clearly depend on the nature and structure of the company as to whether this option would be feasible.  

Succession is, of course, not always an option for all family businesses. There may be no children to hand a business on to or the next generation may simply have other career interests. That is not necessarily a disastrous because, like all companies, if there is a strong balance sheet and a solid business plan in place it is still possible to realise value by a sale of a family business to an outside party, even in this challenging economic climate. 

Stuart Duncan is a Partner and family business specialist with Edinburgh-based legal firm Davidson Chalmers

 

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