Small to medium-sized family-owned businesses remain the cornerstone of the economy in Ireland. When it comes to family businesses, the rate of growth of the business often slows down with each transition onto the next generation. This might be due to outside factors, for example, a maturing sector or industry within which the business operates, while it might also be attributable to a lack of effective succession planning.
We work with many family businesses across a range of sectors, and indeed we are ourselves a family business. Below we give some practical advice & outline tax-saving opportunities that are available when it comes to family business succession planning:
1. Form an agreement at the outset, taking both current owner and future planned owner perspectives into account. You will find, depending on the family (!), that both parties generally want to be fair with each other.
2. Where more than one son or daughter is carrying on the business, have a clear share or partnership agreement, and have a clear plan as to what each person’s role & expectations will be. Initial disagreements or differences in opinion can be ironed out and resolved today and avoid strained working and family relationships in the future.
3. Allow time for shadowing, mentoring or a period of apprenticeship whereby the next generation learns, develops and grows into the business owner role.
4. Start planning now to ensure you qualify for very valuable retirement reliefs which can eliminate any capital gains tax which would otherwise be payable at a rate of 33% on the sale of your business. Using a very simplified example to give some perspective on this, if you made an agreement with your children to sell your business to them for €1,000,000, you would ordinarily be required to pay €330,000 (33%) in capital gains tax to the Revenue. If you plan correctly and qualify for retirement relief, you will save €330,000 in tax.
5. Look at your business as a part of your overall pension plan. Consider taking a staged payment from your business into your retirement years – it will provide a regular income for you in retirement while providing cashflow benefits to the succeeding family members.
While there are some common threads, each case is unique and has its own considerations. Financing the buy-out is a key consideration to be tailored to the individual circumstances i.e. where do 30-somethings find financing to buy over a business at a reasonable valuation from their parents.
Savings, borrowings or some combination of both can be used. Alternatively, a share-buyback scenario could arise, in which case the company would effectively be funding the buy-out while leaving remaining family shareholders with full ownership of the business. A sole trader business could be sold as a sole trader business to a son or daughter, or alternatively, the sole trader business could be incorporated as part of the overall succession plan. There are many ways to structure the sale – the right option for you will depend on the type of business, its current financial position and the number of family members involved.
If you have any questions on this topic or if you are considering the transition of your business to the next generation, get in touch. You may also want to read this post on retirement and succession planning.
Contact us today to arrange an initial consultation.