Exit strategies for family companies

For a family business, an exit strategy often focuses on how to pass it on rather than achieving a trade sale of the company. Usually succession will be ensured in the form of a Vendor Initiated Management Buyout – or ‘VIMBO’ – particularly if those who are to succeed are not just family members.

The VIMBO can also work well in a family deal if Mum and Dad want full value rather than gifting the business, or if they need some sort of carried interest or ongoing income.

Share buyback

In small deals, the variations in the share buyback theme can be very useful in creating a deal structure to suit an individual business and its owners’ needs.

We helped a family business in Suffolk achieve succession using this type of structure. It was a small but sustainably profitable company, and had grown to have branches in Essex, Norfolk and Cambridgeshire. Mum and Dad had been running it for many years, but had involved their two sons as full-time directors.

As the sons took more responsibility in the business, the family felt it was time for them to take full control. The aim was twofold: to achieve the transfer, and to pay out profits to the parents tax efficiently. If the arithmetic stacks up, this can be done using a buyback of shares.

Tax legislation gives favourable tax treatment to an individual when a company purchases some of its own shares, provided certain hoops are jumped through. To outline the steps:

1. 1. 1. The sons were given a minority holding a few years before Mum and Dad were ready to fully hand over the reins. As the business qualified as a trading company, there was no tax charge for either the parents or children due to the availability of tax reliefs.

    

   1. 1. A few years down the line, Mum and Dad decided to retire and the company bought back their shares. The proceeds were taxed as capital receipts for the sale of their shares, and thus were not subject to income tax. Business Asset Disposal Relief (otherwise known as Entrepreneurs’ Relief) was available as both the individuals and the company met the conditions, so the tax charge was only 10% on the first £1M of value and 20% above that.

    

   1. The company then cancelled the shares so that the shares held by the next generation were the only shares in issue, meaning that the sons owned all of the company.

A few ground rules

In every deal there are company laws to observe, or else there is a risk an invalid purchase of shares. There are also tax rules to follow, which are often not as so clear cut.

In this case, the two keys matters that needed to be established were that the company was a trading company (for the purposes of BADR), and that the purchase of shares was for ‘bona fide commercial reasons’. The ability to clear this with HMRC in advance is helpful.

Of course there is usually a financing issue too. In this case the company had the cash to pay-out, but what if it hadn’t? There are ways round this though, and indeed this might be a cue to consider a management buyout style structure.

Get in touch; we’ve helped many family companies achieve their exit plans.