The next generation can be your exit strategy. We have worked with both sellers and the management teams
Business continuity depends upon the next generation. But succession planning can be complicated and sensitive.
Structuring share ownership for succession
Where people are involved it is usually not enough to look purely at the legal aspects – good advice often requires account of the individuals involved and assessment of risk areas. Our years of experience will help you pin point the best planning for your circumstances.
Inheritance tax – business property relief
One of the more generous tax exemptions available at the moment is the 100% exemption to inheritance tax for shares that qualify for business property relief. In a nutshell, unquoted shares do qualify for business property relief. Another generous tax exemption is the ability to gift shares and avoid paying inheritance tax entirely if you survive the gift by seven years or more.
Review of corporate structures for succession
Usually plans for the future are cemented via rights given to shareholders under the articles and or shareholders’ agreement. There are plenty of possibilities all of which depend upon your objectives.
- Parents who want to pass ownership down to children but do not trust the strength of the marriages of their children – in such cases we design provisions for the articles or shareholders’ agreement which would make it difficult for an ex-spouse to claim entitlement to shares on say divorce.
- Partners who wish to retain wealth in the right hands. Changes in the law have meant it is now much more likely that a pre-nuptial agreement will be enforceable. We also advise partners who are being asked to sign pre-nuptial agreements.
- Fellow shareholders who are concerned that spouses may inherit under a will and inherit voting power – in such cases we can draft amendments to the articles or shareholders’ agreement which remove voting rights on death but pass rights to dividend and capital to the estate. The advantage here is for the spouse who inherits the shares and the capital value that goes with the shares and the existing shareholders who are free to continue running the business.
- Cross options for shareholders who want to acquire shares but are lacking in funds. We can draft cross option agreements into the articles or shareholders’ agreement which allow existing shareholders to acquire shares from a shareholder or a shareholder’s estate in stages as funds are available. Cross options can be supported by an insurance policy.
Freezer shares are popular and used to manage wealth generation in family businesses. The plan is new shares will be gifted to the next generation which operate as an inheritance tax mitigation strategy by keeping the future growth of the company outside of the estate of the older generation.
Freezer shares work in a variety of ways. They are designed to protect the older generation and motivate the younger generation. The basic idea is that current value attaches to the current shares and all of the future value held by the next generation attaches to new shares held by them. There will be tax implications on the receipt of new shares if the recipients are working in the business.
Example of the use of freezer shares
Using a freezer share the older generation could be given a right to sell their shares under a share buy back at a predetermined value and a preferential dividend to cover the equivalent of a pension and nursing home costs. The younger generation take what is left. There are variations on the theme.
Using equity incentives to pass ownership
In the right circumstances, equity awards can provide a succession plan for the next generation which are tax efficient. To be effective any award has to have meaning to the recipient and we look at that aspect as well as the legal points. A popular choice is the use of EMI options because they are so flexible and tax efficient. The basic idea is that the ownership is passed to the next generation when they exercise the EMI option and become shareholders.
Growth shares as part of business succession plans
Growth shares are useful for incentivising new managers. The idea is that the holder of growth shares can receive a dividend and or receive a share of the sale proceeds if the business is sold for more than a specified amount. How the entitlement is defined will depend upon how much the current owners want to give away.
Management buy outs
The next generation can be your exit strategy. We have worked with both sellers and the management teams. With an MBO there are always a variety of issues to plan for – the most important of which is usually funding for the MBO where we can deliver ideas for you.
Big decisions arise when it comes to succession planning in a private company. Our experience tells us that the best decisions are taken where you allow yourself the time to take advice on the options and then think them through carefully. There will always be risks associated with transfer of ownership. We will address the risks and look to see if we can iron them out.
Dual-qualified in the UK and USA and a qualified solicitor since 1998, Helen is a partner and heads up the corporate team, advising start-ups, SME companies, partnerships, entrepreneurs, investors and shareholders.