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The Family Business Sell up, give up or pass it on

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Company has good profits but limited cash. Shares stand at large capital gain ... Need to build and incentivise management team ... – PowerPoint PPT presentation

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Title: The Family Business Sell up, give up or pass it on


1
The Family Business Sell up, give up or pass it
on?
2
Passing on the Family Business
  • Do nothing
  • Gift
  • Considering the family as a whole
  • Sale
  • Demerger or division of assets
  • Setting up a new business

3
a. Do Nothing as a Strategy
  • Inheritance tax
  • Preserves income
  • But new management must be motivated
  • Share options
  • Bringing into partnership
  • Some guarantee of succession if family
    management
  • Wills and intestacy

4
b. Gift - Introduction
  • Inheritance tax
  • BPR (usually 100)
  • Dont throw it away on your spouse
  • He/she may not keep it

5
b. Gift By Will Case Study (Bloggs Ltd)
Mrs Bloggs dies residue to
Mr Bloggs
Bloggs Shares
Discretionary Trust
6
b. Gift By Will Case Study (Bloggs Ltd)
  • Company sold for 2 million after 1st Death
  • This sum is not in Mr Bloggs Estate
  • Saves say 800k Inheritance Tax
  • But he has access to the proceeds

7
b. Gift By Lifetime Giving
  • Simple transfer
  • Hand over ownership
  • Hand over management
  • Inheritance Tax
  • Capital Gains Tax

8
b. Gift By Lifetime Giving Assam Tea Company
Ltd
  • Property investment company (no BPR)
  • Donor relies on for income
  • Donor is only available manager

9
b. Gift By Lifetime Giving Assam Tea Company
Ltd
  • Capital reorganisation
  • A Shares carry all current rights
  • B Shares acquire all rights later
  • Giving
  • A shares retained
  • B Shares given to family trust
  • Service contracts for donor/director

10
c. The Family as a whole - Case Study The
Situation
  • De Luxe Hotel Ltd (DLHL)
  • Founder gave 20 of shares to each child
  • Only son John wants to continue
  • Others would like cash

11
c. The Family as a whole - Case Study The Problem
  • John has no money
  • Company has good profits but limited cash
  • Shares stand at large capital gain

12
c. The Family as a whole - Case Study The
Solution
  • Newco is formed
  • John swaps his shares for Newco shares
  • Newco given options by siblings to buy their
    shares over a period
  • Gain limited to annual CGT exemption

13
c. The Family as a whole - Case Study The
Solution

John
shares sold by options annually
Newco
other children
DLHL
14
d. Sale - Introduction
  • The price and terms
  • deferred payments
  • security
  • loan notes
  • who is the buyer?
  • Raising the money
  • financial assistance
  • disposal of unwanted assets
  • cashflow
  • Taxation issues
  • Legal issues

15
d. Sale - Case Study The Situation
  • Specialist printing company
  • Formed by the present MDs Grandfather in 1947
  • Turnover - 8m
  • Pre Tax Profits - 700,000
  • 42 staff
  • 2 presses
  • Shareholders
  • Father 25,000
  • Son 5,000
  • 2 Working Directors 6,000

16
d. Sale - Case Study The Situation
  • Sale Price 1,200,000 cash
  • 1,200.000 loan guaranteed by
    bank
  • 700,000 unsecured loan
    notes
  • 3,100,000
  • Raised by Company cash balances
  • Factoring agreement
  • Bank loan
  • Bank guarantee facility

17
d. Sale - Case Study The Solution - Structure
  • Son, new FD and working directors form Newco
  • New FD subscribes for shares and son and
    directors exchange their shares in Oldco for
    equivalent shares in Newco
  • Newco/Oldco carry out financial assistance
    procedures and enter into bank facilities
  • loan agreements
  • debentures by Newco and Oldco
  • Factoring Agreement
  • Priority Agreement
  • Cross-company guarantees
  • Newco/Father complete share sale agreement
  • 1.2m cash paid
  • 1.9m loan notes issued

18
d. Sale - Case Study The Issues
  • Tax. Taper Relief. CGT allowances
  • Warranties/disclosures
  • The deferred terms and security

19
e. Demerger - Introduction
  • A dividing up of business assets
  • Partnership/sole trader
  • Company law implications
  • Tax
  • Types
  • A s110 Insolvency Act 1986
  • B s 213 Taxes Act 1988
  • A transfer to members of shares in subsidiaries
    which are trading subsidiaries
  • A transfer to members of a trading division
  • If the necessary conditions are met-
  • No income tax distribution
  • No capital gains tax distribution

20
e. Demerger Case Study The Situation
  • Old Style Demerger
  • Property Investment Co formed by father holding
    18 commercial and residential properties
  • Shareholders son 1, sister, mother, son 2
  • Son 1 and sisters shares converted to A shares
    and carry the right to receive A properties
  • Mothers and Son 2s shares converted to B shares
    and carry the right to receive B properties
  • Oldco liquidated. Members voluntary
    liquidation

21
e. Demerger Case Study The Solution - Assets
distributed as follows
Newco A
Newco B
Old Co (In Liquidation)
Shares to Son 1 Sister
A Properties
Shares to Son 2 Mother
B Properties
22
e. Demerger Case Study The Issues
  • Issues
  • Valuations
  • Property transfers
  • Stamp duty

23
f. Setting up a new business - Introduction
  • Satisfying different aspirations
  • Finance
  • Company/partnership/sole ownership
  • Tax incentives?

24
f. A New Business - Case Study The Situation
  • Different (but related) trade or business
  • Motor dealership family owned
  • No successor to business
  • Need to build and incentivise management team
  • Son want to acquire related business of petrol
    filling station and establish a community store
  • Existing activities carried on through single
    company
  • Family wanted to assist son, preserve and if
    possible grow business and create possible exit
    route

Single Trading Company
Family
25
f. A New Business - Case Study The Solution
  • Restructured putting each business into separate
    subsidiary company

26
f. A New Business - Case Study The Solution
  • Restructured putting each business into separate
    subsidiary company (see company reorganisation)
  • New business acquired in new subsidiary financed
    through group facilities with revised
    shareholding
  • Director employees with overall control of group
    incentivised through EMI Scheme
  • Senior Managers of subsidiaries incentivised with
    bonus scheme with ability to create phantom
    share scheme or other additional incentives

27
Summary
  • Each case is individual
  • Plan as early as possible
  • Identify your needs and aspirations
  • Identify others needs and aspirations
  • Take good professional advice
  • Follow up with correct action

28
The Family Business Sell up, give up or pass it
on?
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