Handing over your business can involve head and heart

Business owners dreaming of giving it all up and retiring to a life of leisure have several options open to them when it comes to handing on control of their company.

Which choices they make will depend on several factors, some of them financial but many of them are more to do with emotion and loyalty.

Those who simply want to extract the best price possible and then move on may find that private equity firms have a lot to offer. These firms have received a lot of criticism recently, mainly to do with how much tax their directors pay, but they do 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 businessmen become very loyal to their staff 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. 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. Or if the firm is very successful, some of its profits could be used to raise part of the necessary finance. This approach would need Inland Revenue clearance but is worth exploring.
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.

Throughout the succession planning it’s important to get advice from your accountant, lawyer and possibly your bank manager. They will have helpful suggestions and can ensure that the agreement is fair to everyone.

This is particularly important if you are passing the business on to family members because emotions can easily get in the way. Sons and daughters may feel guilty that they are demanding too good a deal from their parents, while parents may feel they are taking too much out of the business making it difficult for their children to succeed in the future. Independent opinions from lawyers and accountants can help guide and reassure both sides.

Once an agreement has been reached it’s important to get it all written down properly so it’s legal and everyone knows where they stand.

This will enable you to plan a proper exit strategy that will allow you to bow out gracefully without affecting the smooth running of the business.

Peter Sutherland is a Partner at Andersons Solicitors and can be contacted on 0115 988 6714 or by emailing psutherland@andersonssolicitors.co.uk.