Succession planning was always a hot topic when markets were buoyant and pricing mechanisms were optimistic.
However, recession meant a number of businesses put planning on hold, and only now, as the “new normal” is bedding in, is the topic of succession seeing a resurgence in popularity.
While a trade sale of a company to a third party seems the most obvious exit route, it is not necessarily the most appropriate, as the right solution will depend on each individual case. The most common solutions that we see are trade sales, MBO/MBI, share options and solvent liquidations.
Whilst the trade sale is not always the most appropriate route, it is often the one that gives rise to the greatest return of value to the selling shareholders as the purchaser tends to be a third party willing to pay a competitive market value. And, there can be tax advantages if entrepreneurs’ relief (ER) applies. However, for this route to work, directors should review their structure at least a year before considering any potential sale.
Since the acquirer often tends to be a third party, there can be a number of practical difficulties that arise as part of a trade sale. These may range from earn-outs (which can have their own complicated tax treatments) to more emotional issues, such as how the new owners (who usually have little or no prior experience or relationships with the people in the business) will structure the company post-sale.
An MBO or an MBI will generally provide a slightly lower return for shareholders as the seller and the acquiring management tend to work together to achieve a shared goal. However, these transactions are likely to evolve over the years representing lower levels of risk to both parties. The deal can generally be structured to provide the seller with a similar tax treatment to a trade sale while ER remains available if the qualifying conditions are met. Again, the shareholding should be reviewed at least 12 months before any transactions take place.
The acquirers in this case tend to be current (or prospective) employees which means employment-related security rules can apply to the transaction and should be considered up front. Failure to do so can result in sizable income tax liabilities.
There are other “softer” mechanisms that can be used to ensure an effective line of succession.
Since the introduction of Companies Act 2006, it has become very straightforward for companies to repurchase their own shares. There are a number of conditions that need to be met, not least that the company is solvent, but it is relatively easy to assess the situation accurately up front.
It can also be possible for an existing shareholder to sell shares back to the company and benefit from ER on the disposal as long as the qualifying conditions are met.
Consequently, a purchase of own shares has become an increasingly popular route to structure the exit of one shareholder (or group of shareholders) from a trading business, where the remaining shareholder(s) wish to carry on.
Share options are also a very useful tool when it is important to provide “golden handcuffs” to key employees to assist in a succession plan over a longer timeframe. There are a number of ways to implement a share option scheme.
In particular, the HMRC approved scheme, enterprise management incentives (EMI) are very popular as HMRC will provide advance assurance on the tax treatment – the employees can often benefit from ER on the disposal of the option (or the shares that they acquire as a result of the option), while the company can obtain additional tax relief depending on the construct of the option.
Finally, if no other options apply, it might be desirable to sell all the assets of a company and formally wind it up. The sale of the assets may give rise to a corporation tax charge restricting the amount of cash available for distribution to the shareholders. However, once again ER may apply to the liquidation process where certain conditions are met (both before and, from April 2016, after the liquidation has commenced). It is important that the shareholding and wind-up process is reviewed before the company ceases to trade to ensure that ER will apply.
Planning for the future, of late, has been a luxury that most could ill afford. However, it’s back on the table, and for those that have resolved to stand back, get out or move aside to let the next generation take things forward, there are many options available. It’s one New Year’s resolution that, in 2016, is becoming much more doable.
• Marc Shenken is a partner at accountant and business adviser Scott-Moncrieff