Saffery Partner Hannah Mazrae looks at Succession Planning: how can I pass on my business? We also get to meet Personal Tax Director Suzanne Wasson and hear how she got married with Elvis and Sammy David Jr present!

Succession planning: how can I pass on my business?

Deciding to leave a business can be as difficult as starting or buying a new one. If you’re looking to exit your business, what are your options?

Passing on your business to the next generation

For family-owned companies, the preferable option could be to pass the company’s shares to the next generation to continue the family’s legacy.

However, sometimes this is not practical. For example, adult children may not wish to give up their existing careers to take over the family company, or they don’t have the right experience to take over as the business owner.

Trade sale

A trade sale of a company refers to the sale of a business to another company in the same industry or a related sector. It typically involves the transfer of ownership and assets, providing the selling company with an exit strategy while allowing the acquiring company to expand its market presence or enhance its capabilities.

You could trade sale the company’s shares to a third-party purchaser or, possibly, to a private equity house.

A trade sale will often mean that the owner can make a clean break and completely step away from the business.

The price received on a commercial sale can often be the optimal price. From a tax perspective, the gain on the sale of the shares should be taxed at capital gains tax rates.

Capital gains arising on the sale of shares can currently attract capital gains tax rates as low as 10% on the first £1 million of lifetime capital gains that qualify for Business Asset Disposal Relief (BADR). While BADR has greatly reduced over recent years, a merged tax rate of between 10% (under BADR) and 20% (the standard rate of capital gains tax on a sale of shares) will still be attractive for many business owners.

Management buyouts (MBOs)

An MBO is when the existing management team purchases the business from its current owners. In an MBO, the management team takes control and ownership of the company to run and grow it independently.

From a tax perspective, like a trade sale, an MBO should solidify capital gains that (under current rules) would be taxed at a merged rate of between 10% and 20%.

Employee Ownership Trust (EOT)

An EOT is an alternative legal structure that is gaining popularity, where a trust holds company shares on behalf of its employees.
This involves a sale of a controlling interest in the company to an EOT for an arm’s length price.

With an EOT, the majority of shares in the company are owned by the EOT for the long-term benefit of the company’s employees.

In EOT sales, a higher proportion of the sale price is often deferred and extends over a longer period compared to trade sales or MBOs. It’s crucial to model this carefully to avoid potential constraints on the ongoing business due to future cashflow commitments.

Tax and EOTs

From a tax perspective, sales to EOTs have attracted a lot of media interest because no capital gains tax will arise on the sale of the shares by the owner to the EOT.

However, it’s important that the sale to an EOT should not solely be driven by the beneficial tax treatment.

Making sure the culture of the business is commercially suited to employee ownership should be a more important driver. A key focus for a successful transition to employee ownership will likely include careful consideration of the company’s values, purpose and behaviour of its people. To achieve a successful transaction to employee ownership may require the company’s culture to change over time.

Also, the no-tax treatment should be looked at as a trade-off against a lower price for a friendly transaction with more deferred consideration, such that the position net of tax could be more akin to the net position on a trade sale or MBO.

For this no-tax treatment to be available, there are multiple conditions that must be met. One important condition is that the EOT must hold a controlling interest in the company or, looking at it the other way, the previous business owners must relinquish control to the EOT.

However, there is still a lack of clarity regarding some of the wider tax issues related to EOT structures. In a consultation last year, the government outlined the aim of ensuring that the EOT tax regime remained focused on rewarding employees and encouraging employee ownership, while preventing tax advantages being obtained outside of these intended purposes.

The outcome of the consultation is still awaited, but it’s hoped that the tax position for EOT structures will become clearer for both advisers and business owners.

Choosing a business exit strategy

If there are no family members wishing to take over the business, trade sales (including private equity) and MBOs are well trodden paths and can work in the right circumstances.

EOTs with the majority of shares being owned collectively for the long-term benefit of the company’s employees as a group also appear to be becoming more popular, but it’s important that the obvious tax advantages do not overlook the key commercial and cultural aspects of employee ownership.

When looking at succession planning, it’s important to get advice early on. If you’d like any help in identifying the right route to take for your business, get in touch with our team; we can also help you to develop a business exit plan.

If you would like to discuss further, contact Hannah Mazrae e: [email protected] Tel. 01202 204744

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Name: Suzanne Wasson

Role: Personal Tax Director

Time at Saffery: Nearly 12 years

What’s the best bit about your job?

I love the fact that it is so diverse, and no day is the same. Tax is very complex, which has its downsides, and the ever-increasing complexity certainly needs to be kept in check, but that also makes it very interesting.

I also really enjoy helping clients navigate the ever-complex tax landscape. For the layperson it can be very daunting and being able to explain complex tax issues and help clients understand their tax position is extremely rewarding.

The culture of Saffery is really important to the business and the people within it – what do you think you bring to the team and what do you contribute?

I am a good listener and a real believer that everyone’s ideas should be heard, as no one has all the answers.

There is a great collaborative spirit at Saffery, and I think people see me as approachable and fair and always willing to listen and consider other viewpoints, and in turn, helping others develop their own skills and progress in their careers.

I know how grateful I was to have that support and guidance in my own career at Saffery, and to be able to help bring on the next generation is a real privilege.

If you weren’t doing this role, what might you be doing?

I love travelling and have a passion for scuba diving, although I don’t get to do either very often lately. I think I would have like to have been involved in marine conservation or something similar.

What do you enjoy doing outside of work?

I love going for long walks with my dog, we have some of the most amazing countryside and beaches. He is a very typical Labrador that eats everything he sees, so I have to keep a very keen eye on him, which can be a challenge!

Tell us something about yourself that we don’t know

I got married in Las Vegas at the Little White Chapel with Elvis, and Sammy Davis Junior was our photographer!

Who or what inspires you?

My nan really inspired me. She was such a kind lady, and everybody loved her, but she had a tough life, coming from a poor background and being brought up during the war. She also suffered quite a few personal tragedies but always remained positive.

She worked hard and was very determined. She always told me that you can achieve anything if you put your mind to it and she was testament to that.

What’s your favourite place in Dorset?

There are so many it is difficult to choose, but I would probably say Hengistbury Head as it is somewhere I go quite often. I love walking along the beach and the views from the head are fantastic. I always feel a real sense of calm when I am there.

Give 3 words to describe yourself

Compassionate, hardworking, and adventurous