Lake Falconer Partner

What are the best buyout options for family businesses?

Planning for succession in family businesses must take account of personal relationships alongside managing family wealth and inheritance tax.

By Lake Falconer

The succession and exit choices for family businesses are varied:

Trade sale. Would you consider deferred consideration or an earn-out? The latter is likely to increase the total consideration that might be achieved.  To what extent will the shareholders’ tax positions influence the preferred outcome?  And, most importantly, what valuation will meet the shareholders’ expectations?

FAMBO – A Family Buyout.  Sale to the next generation and/or management in a management buyout – we like to call these deals Succession Buyouts. These can be tailored to meet the needs of the family, and if done carefully can be very tax efficient

Employee Trust Buyout. If the circumstances are right you might want to consider going the “full John Lewis” and transferring some or all of the company to the whole work force.  The trust model should provide a stable and long-term structure for employee ownership. Since 6 April 2014 there is a capital gains tax exemption for such sales. The tax saving is, on its own, not enough of a reason to take this route but it makes it attractive if you think this might suit your family business

Appoint a non-family management team to run the business. You need to think about incentive deals or share schemes to incentivise them, and corporate governance if the family are to take a back seat

Find another family firm to merge with. There needs to be a strong overarching logic to the combination and the teams need to be capable of integration.  I’d worry that bringing two lots of family tensions together might make reaching agreement difficult

Wind up the firm and “turn the lights off”. This doesn’t preserve the emotional legacy of the firm, but if trading has run down and yet there is significant cash or property in the firm it can preserve family wealth.  If done carefully Entrepreneurs’ Relief can be available on the proceeds

Many of these choices are universal yet a different slant is needed to make sure they fit with family objectives. The Family Buyout is a good choice as it can be tailored to fit the family’s objectives. Given the dynamics of reaching agreement within a family it’s helpful to meet early with an outside adviser experienced in these issues who can act as a facilitator to encourage exploration of the options.

Get in touch with us to explore these options in more detail.