In his final blog of 2020, Sam Lyon, Head of Corporate and Commercial at Cartmell Shepherd Solicitors make a case for why family businesses should not allow the covid pandemic to delay making important plans for the future.
“With the pandemic still causing huge problems for many businesses, it’s perhaps not surprising that many remain focussed on survival without too much thought for the future. If possible, however, it’s still important to consider what will happen once the pandemic is over, especially if you are planning to retire from your business and hand it over to the next generation. It could even be that a reduction in business now could provide you with more time to plan and get new people and systems in place.
If you are intending to move on, it’s important to have a succession plan in place as early as possible so that your business can be handed on in a way that is helpful and profitable to all concerned, whether that is to family members, work colleagues or outsiders. Which choices you make will depend on several factors, some of them financial but many of them are more to do with emotion and loyalty.
If your family aren’t interested in the business and you simply want to extract the best possible price, you may find that private equity firms have a lot to offer. These firms have received a lot of criticism over the years, but they can have a role to play.
They can provide sellers with a simple way out at an attractive price with money up front. That can be very appealing to someone who wants to bow out quickly with a bulging bank balance to finance a comfortable well-earned retirement. It’s particularly appealing when compared to the possible alternative of selling to managers or partners within the existing company structure who may have to buy in instalments over several years. No one wants to wait for their money if they can help it.
The temptation to cut and run is high, but that’s when emotional ties kick in. Most business owners become very loyal to their people and worry about what will happen when people who’ve worked hard for the firm for several years suddenly find themselves at the mercy of hard-nosed outside owners.
It’s quite possible that a private equity firm will want to put in new management and perhaps streamline the operation leading to redundancies. Such prospects can make the seller feel disloyal. There may also be concerns that the whole nature of the company will change. That too can worry entrepreneurs who’ve spent all their lives building the business up and still feel a strong attachment to it.
These feelings can be magnified for directors running a family business where sons or daughters do want to take over. It means many people prefer to ignore the higher price offered by private equity firms and sell instead to the next generation, whether family members or long-term colleagues.
In these cases, the best way to ensure a smooth succession is to start planning as early as possible, preferably several years ahead of the target retirement date. This is particularly important for small to medium size firms where the departure of one key person can have a major impact. Hold meetings with those who will be left running the company, so you can agree an exit strategy.
If you own a large share of the business, the remaining partners or directors may need to raise money to buy you out.
You may choose to sell your shares back over several years, so the firm’s finances aren’t put under too much pressure all at once. In that case, you may need to change your will, so the arrangement can continue should you die before the sales are completed. There could be tax implications whichever system you choose for withdrawing capital from the firm so professional advice should be sought.
If you own the business premises, you will need to decide whether to sell or lease them back to the firm. This could be influenced by how much capital you need to raise or whether you would be content with a monthly rent.
Whatever approach you take, you should consult your legal and financial advisers to get independent advice, especially if family members are involved because sometimes emotion can cloud practical considerations.