Business Succession Planning

Legal strategy for succession planning

Successful business succession or an exit through retirement, a sale or a transfer to family members or future generations depends on careful planning and the right structures being established in advance.

Family business succession can be complicated and sensitive. Early planning can help facilitate a smoother transition, manage tax liabilities and reduce the risk of conflict.

We have extensive experience supporting family-owned and other privately held businesses with succession planning and strategic exits. Contact us to discuss your circumstances, explore the available options and receive initial guidance on the issues to consider.

Family succession or sell the business?

A key decision is whether to transfer your role and potentially your shares to one or more family members, or whether selling the business and realising its value is the better option.

The right approach depends on your circumstances, including whether you own the business outright or have other shareholders and directors. Can the business operate successfully without you? Will a gradual transition be needed? What might the business be worth on a sale, and would that meet your expectations?

Key considerations include:

• Transferring ownership to family members or other successors.
• Selling shares to existing employees.
• Selling to a third-party buyer.
• Understanding the tax implications of each option.
• Planning the transition or sale well in advance.
• Restructuring or reorganising the business to facilitate succession or an exit.

A strategic approach is essential. Our commercial and tax experience enables us to help privately owned businesses assess their options, manage risks and plan for a successful transition.

Structuring shares in your business for the next generation

Succession planning involves more than legal and tax considerations. It is important to consider the people involved, their respective objectives and the potential for future disagreements. We can help you identify relevant risks and develop structures suited to your circumstances.

How does Inheritance Tax work with family businesses?

Inheritance Tax treatment depends on the circumstances and the reliefs available. Business Property Relief may reduce the value of qualifying business interests subject to Inheritance Tax, but the relief is subject to statutory conditions and limits. A gift of shares may also fall outside the donor’s estate if the relevant conditions are met, including the rules on surviving seven years after making a potentially exempt transfer. The tax treatment should be reviewed before any transfer, particularly where the business or its ownership structure may change.

Setting up corporate structures for succession

Succession planning often involves establishing appropriate rights and restrictions through the company’s articles of association and/or shareholders’ agreement. The right arrangements depend on your objectives and the interests you want to protect.

For example:

• Parents who want to transfer ownership to their children but are concerned about the potential consequences of a divorce may consider provisions designed to restrict transfers of shares to former spouses, subject to the relevant legal and family circumstances.
• Business partners who want to protect their respective interests may need to consider the interaction between company arrangements and personal agreements, including pre-nuptial agreements. The enforceability and effect of such agreements depend on the circumstances.
• Shareholders who are concerned about a spouse inheriting voting rights may consider provisions separating voting rights from economic entitlements on death, where legally and commercially appropriate. This may allow an estate to retain an economic interest while helping the remaining shareholders continue to manage the business.
• Shareholders who want to acquire shares but lack immediate funds may consider cross-option arrangements. These can provide a mechanism for buying or selling shares following specified events, such as death, and may be supported by insurance. Any staged payment arrangements should be carefully documented.

Freezer shares

Freezer shares can be used in some family businesses as part of succession and wealth planning. Typically, existing shares retain rights to the current value of the business, while new shares held by the next generation participate in future growth, subject to the rights attached to each share class.

These arrangements can help the older generation retain specified rights while giving the next generation an interest in future growth. However, the tax treatment is fact-specific and may involve valuation, Income Tax, Capital Gains Tax and Inheritance Tax considerations. A suitable structure should be assessed before shares are issued or transferred.

Using equity incentives to pass ownership

Equity incentives can form part of a succession plan where the next generation or key employees are expected to take on greater responsibility. The arrangement needs to reflect the recipient’s role, the intended transfer of ownership and the relevant tax conditions.

EMI options may be suitable for qualifying companies and employees. They can allow employees to acquire shares by exercising options, subject to the scheme terms and applicable requirements.

Growth shares as part of business succession plans

Growth shares can provide an interest in future growth to new managers or family members without necessarily giving them a share of the company’s existing value. Depending on their rights, growth shares may participate in dividends or sale proceeds once a specified hurdle has been exceeded. The structure should reflect how much of the future value the existing owners intend to share.

Management buy outs

management buy-out may provide an exit route while allowing the next generation of management to take ownership. We have experience supporting both sellers and management teams through MBOs. Funding is often a central consideration, alongside the transaction structure, due diligence and the terms on which ownership transfers.

Lawyers for succession planning

Succession planning involves significant decisions about ownership, control, tax and the future of the business. Starting early gives you more time to compare the available options, address potential disputes and put suitable arrangements in place. We can help you assess the risks and develop a practical strategy for your business and its future owners.