Selling a Family Business

Whilst the hugely successful HBO TV series ‘Succession’ recently thrust the concept of transferring the ownership of a family business, the actual process is far more nuanced than the fraught dealings of the Roy family that played out on screen.

But whilst ‘succession’ planning is in general not an uncommon notion in UK business, sometimes the succession of a family business no longer suits the needs of those involved, and they may instead seek to sell-up altogether.

In this article we’ll set out the process of actually selling a family business, dealing with issues such as valuation, taxation, and transferring assets;

Family Business

The first thing to consider is what exactly we mean when we talk about a family business. According to the Institute for Family Business (IFB), the following criteria can be used to define a family business:

• The majority of votes are owned by the person or persons who established the firm, or those who have acquired the share capital of the firm, or who are in the possession of their spouses, parents, child, or child’s direct heirs.
• At least one representative of the family or kin is involved in the management or administration of the firm.
• Listed companies meet the definition of a family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25% of the right to vote as mandated by their share capital.

The importance of family businesses to the UK economy is reflected in a number of statistics, many of which were published in the Oxford Economics report ‘The State of the Nation – The UK Family Business Sector 2021-22’.

According to this report there were 4.8 million family businesses in the UK in 2020, a figure which represented 85.9% of all private sector businesses at the time. Between them, these family businesses employed 13.9 million workers, a figure which made up 51.5% of all private sector employment, and contributed £575 billion to the UK economy.

The value delivered to the UK as a whole by family businesses isn’t limited to their economic input, vital though that may be. A 2020 report on Family Business and Community Engagement, written by academics from the Universities of York and Birmingham found that familial operations generally engage more with local communities around topics such as volunteering, establishing foundations, environmental action, charitable giving, and supporting business organisations such as Local Enterprise Partnerships.

Significantly, in the context of succession or selling a family business, the PwC 10th Global Family Business Survey 2021 reported that 82% of such businesses said that protecting the business as the most important family asset was a key aim, while 65% reported that they wanted businesses to remain in the family, and 64% wanted to ensure a legacy was created.

Bearing all of this in mind it’s clear that choosing to sell any family business is a huge decision, and the practicalities of the process are likely to be matched if not overshadowed by the emotional stress involved.

Selling

The reasons for making a sale of this kind will clearly vary depending upon the specific circumstances of the family business in question, ranging from the desire to fund retirement to the lack of an obvious successor, but in most circumstances the final decision will be based on a complex interaction of factors. Amongst the issues which are likely to persuade the owners of a family business to sell are things such as:  

• The business may has diversified its operations over the years, and you wish sell part of the business so you can concentrate on a particular section;
• Growth within the company has hit a plateau, with no sign of things getting better in the immediate future
• There are no viable strategies being put forward across the business which are likely to increase profits
• The passion which you, as the person who founded the business, felt has faded over the years and you feel ready to step back
• There is nobody within the family who is ready to ‘step up’ and take control via a seamless hand-over
• The market has altered in a manner that you don’t feel equipped to cope with, via factors such as the rise of a new competitor or changes in customer demand.
• The profits being generated are insufficient to finance growth or necessary investment
• Subsequent generations lack the enthusiasm needed to keep the business running as a family concern
• An offer has been made for the business which is too good to turn down
• Running the business is causing friction within the family which could be resolved by a sale
• Shareholders in the business may need to raise cash – to fund retirement plans, for example – and a sale is often the quickest means of doing so

It makes sense to contingency plan for the time when a sale might be appropriate. When the right circumstances for a sale do arise it can take time to carry out the practical preparations needed and to persuade other family members that giving up ownership of the business is the right step to take.

Once a decision has been made in principle the family members involved in the business need to be engaged in in-depth discussions on the implications of selling and the reasons for doing so.

In most cases discussions of this kind will be held at board level with input from family shareholders, and should focus on the valuation being looked at as well as the pros and cons of selling at all.

If the decision to sell is endorsed then the question of exactly how to make the sale will arise. In simple terms there are a number of options that can be pursued:

• A trade sale to another business
• A sale to an institution or investor such as a private equity firm
• An initial public offering featuring a stock market listing
• A buyout by the management tor employees of the business
• A voluntary liquidation of the company

Each of these options offers specific challenges and advantages, and expert, professional advice should be sought when deciding which is right for your particular family business.

Having experts such as accountants and lawyers specialising in business law on hand throughout the process of selling your family business could make all the difference when negotiating what is a hugely complex process. They should help you to structure the sale and to break the process down into more easily manageable individual steps.

These steps will include highly technical processes such as preparing the company for sale, planning for the tax implications of a sale, valuing the business, marketing the business, negotiating on the price and other terms of the sale such as seller warranties and indemnities, performing due diligence and bringing the transaction to a satisfactory conclusion.

Sometimes the owner of a family business may opt to ‘test the waters’ by selling a smaller share of the business at first, holding the rest in reserve to sell at a later date if the first sale proves successful.

Many owners of family businesses also feel an obligation to the employees of the business and to any family members who may continue in post after the sale has gone through, and negotiating agreements on employee status and working conditions could be part of the wider sales process.   

Preparing for a sale

The best time to prepare for the sale of a family business is actually well before any such sale needs to take place, in order to ensure that the process won’t be rushed if it suddenly becomes a necessity or urgent requirement. Amongst the steps which should be taken when embarking on the sales process are the following:

• If you are selling part of this business, engaging tax and legal advisors to advise on the steps required to demerge that section of the business that is earmarked for sale;
• Engage legal and tax advisors to discuss whether a pre-sale reorganisation would be beneficial to package the business for sale;
• Ensure that the balance sheet for the business is clear and easily understood and represents a true reflection of the value of the business
• Bring all of your accounts as up-to-date as possible
• Ensure that your companies house filings and statutory registers are accurate and up to date
• Go over existing contracts with business partners and suppliers to ensure that they are in order, renegotiating or renewing where needed and settling any disputes which may have arisen
• If the business is reliant on a physical location or premises to operate make sure that a long-term lease is in place
• Draw up formal contractual agreements with employees who have expressed a willingness to stay in place after the sale goes through
• Make sure that the management and organisational structure of your business is set and as strong as possible. The way the business functions may have developed organically over the years, with people understanding and growing into their jobs over time, but the roles played by each member need to be formalised when presented to a potential buyer. 

Working through fairly complex and time-consuming processes such as these will help to ensure that your business is in the best possible shape when presented to prospective buyers, with as many potential loose ends and variables as possible having been dealt with and tidied up. 

If you still have responsibilities for the day-to-day running of the business you should gradually pass them over to the management team to avoid an abrupt or chaotic handover when the sale goes through.

Looking into tax

Looking over the tax implications of the sale of your business with a tax expert will put you in the position of being able to estimate exactly how much tax you’ll be paying once the sale goes through.

The figure you arrive at could have a direct bearing on issues such as how you structure the sale, how much you want the asking price to be and even whether you still want the sale to go ahead.

Sale structure

In simple terms, if you make a profit when selling your family business then you’ll have to pay capital gains tax (CGT) on any amount above the statutory tax-free allowance.

If the family business is a limited company and the sale is structured as a disposal of the business and assets rather than the shares, you could incur a double tax charge. The selling company is first taxed on the consideration received from the buyer, then it will often be necessary to extract the sale proceeds to facilitate a distribution to the individual shareholders. This could potentially result both in corporation tax in the company on the gain and tax at shareholder level on extraction of the disposal proceeds. If the distribution paid via a dividend, the individual shareholder would be subject to income tax rather than CGT.  

Calculating CGTCGT is charged on any gains made in relation to the value of assets that you have held for more than 12 months, but there are tax reliefs that can be applied to lower the final CGT bill.

The current CGT rates are 10% on assets for people who pay the basic income tax rate and 20% for higher or additional tax rate payers. At the time of writing, the personal allowance for CGT in the 23 /24 tax year is set at £6,000, which means that you can make a profit of £6,000 on the sale of your assets before the CGT rate which applies to you is charged.

If the ownership of a taxable asset is held jointly – which may often be the case with a family business – then the allowance doubles to £6,000.

Calculating precisely how much CGT you’ll be liable to pay if your family business sells can be tricky, but the good news is that the Government has published relatively simple explanations of how the calculation is made online, as well as details of the kind of reliefs that are available.

Working with a financial adviser or tax expert is strongly advised as they will have the expertise required to point out any overlapping between CGT and other taxes such as stamp duty, VAT and income tax. They will also help you to fill in your tax return to make all of the necessary declarations, and point you in the direction of reliefs such as Business Asset Disposal Relief (BADR).

BADR was known as Entrepreneurs Relief (ER) prior to the Finance Act of 2020, and is a legitimate means via which you can reduce the amount of CGT charged upon the sale of a family business. You may be able to claim BADR on assets such as:

• A sole trader or business partnership that you partially or fully own
• Shares held in a company
• An asset that is in use within a business when that business is wound up, such as intellectual property (IP) or a physical property

You also need to have owned the business, or shares in the business, for at least two years before the asset is disposed of.

If BADR is applicable it can lead to relatively significant savings on any CGT to be paid. If BADR is applied to the sale of a family business then the CGT charged will only be charged at 10% of any profit over £6,000 no matter what your normal income tax rate is.

For those who normally pay at the higher or additional tax rate, and would expect to pay 20% CGT, this represents a significant saving. There is a lifetime limit to the amount on which an individual can claim BADR, which is currently set at £1 million, and the process of claiming the relief can be done via either your Self-Assessment tax return or by filling in Section A of the BADR help sheet.

Valuation

You may well go into this process with a pretty clear idea in your mind of exactly how much you think your business is worth, but it will still pay to get a business surveyor involved as they will deliver a valuation based not just on an in-depth analysis of your family business but also a deep understanding of the wider market. 

Clearly, arriving at the right valuation is crucial – if it’s too high you’ll put off prospective buyers, but if it’s too low you’ll be selling your family and the business you’ve worked hard to build short.

Remember, as well, that the valuation you arrive at – and the asking price based on this valuation – marks just the start of the process of negotiating the final price to be paid for the business.

The negotiations you can expect to have to go through are just one more reason why any valuation needs to be backed up with numbers, documentation and other concrete evidence. 

Valuing something as complex as a family business is an inherently nebulous task, with factors such as the physical assets of the business and projected future performance having to be weighed against the reputation of your brand, the competitors working in your sector, the reasons for the sale taking place and the wider economic climate.

The mixture of tangible and intangible factors, as well as those over which you have some control and those which are wholly external, means that it helps to have a firm framework in place to guide you toward coming up with a credible figure.  

Brochure

Once you’ve decided on the basis and timing of your sale and reached a valuation you should put together a sales brochure for the business. In practice, is usually referred to as an information memorandum and is generally prepared by your corporate finance advisor or broker.

Every brochure will be unique, just as every business is unique, but it will be probable that the brochure will start with a single page summary listing factors of the business such as the goods and/or services you provide, any USPs, the location of the business, the current turnover and the potential for the business to grow in the future.

The rest of the brochure will cover more detailed information such as the premises of the business, any leases which apply, details of the way in which the business operates, equipment owned by the business, and any other assets. It should also detail the workforce with reference to the skills and experience any new owner can call upon and more detail on those in executive or management positions.

Speaking of employees, it is vital that you keep clear and accessible lines of communication open between yourself, management and employees throughout the process of preparing for sale, in order to ensure that employees feel included in the process and aren’t taken by surprise by a sudden change in ownership.

The more communication there is, the more your employees will buy into the process, something which will help to ensure a smooth hand-over when the sale finally takes place.  

Due diligence

If a prospective buyer is genuinely interested in purchasing your family business then they will want to carry out in-depth due diligence to ensure that they know exactly what they will be investing in.

Amongst the aspects of the business likely to be covered by due diligence are the following:

• Liabilities: Ideally these should be dealt with before putting the business up for sale, or disclosed to the buyer in a clear and transparent manner
• Financial documents: You should gather together detailed documents on the finances of the family business including tax returns which date back at least three years
• Registers: Make sure that statutory registers such as Companies House are completely up to date
• Assets: Make sure you compile a clear and comprehensive list of the assets and properties which are included in the sale, and if the property is on a lease include documents with the details
• Shareholders: Create a document listing clearly the position of any shareholders in the family business and their respective shareholdings
• Intellectual property: Make sure that any copyrights or trademarks are fully protected, registered and listed, as well as details such as your company name and any domain name.
• Contracts: Review contracts pertaining to employees, clients, and suppliers to make sure that they are up-to-date and clear in terms of what they state. Look out for change of control clauses that could be trigger by the sale and bring these to the attention of the buyer
• Insurance: Make sure that any business insurance you rely upon is firmly in place until such time as the sale has gone through

Finding a buyer

There are many ways to find a buyer for your business, from advertising on specialist websites to using local business publications or social media. In some cases you may opt to approach a supplier, customer, or competitor who you think would be interested in purchasing your business.

As an alternative to all of these, and to tap into expertise in the matter of selling a business, you could work with:

• a broker who will make introductions between you and any potential buyers, helping with the initial discussions; or
• a corporate finance advisor who take you through the entire sale process, from preparing the business for sale (including a information memorandum, making introductions, negotiating the deal terms and assisting with commercial and financial due diligence during the legal process.

In return for this they will usually charge a commission of between 1% and 10% of the value of the business, but having to pay the commission could well be more than outweighed by the increased purchase price a broker / corporate finance advisor will be able to negotiate.

Negotiate

Whether you use a broker / corporate finance advisor or not or not you will need to be prepared to negotiate with a prospective buyer keen to secure a lower price or better terms.

While the valuation you arrived at is based on a range of factors it should be set with the negotiation in mind, i.e., with room to be knocked down on the price slightly, although not below a pre-determined minimum level.

You should research the respective buyer to get a handle on what their priorities are likely to be and which of the USPs of your business will appeal to them in a way that might lift the price higher.

Don’t feel afraid to ask for documentary evidence that a prospective buyer has the necessary support to finance the purchase in place, as any hitch in finances could delay or even derail the sale.

The key deal terms agreed with the buyer should be documented in a set of heads of terms and signed by both parties.

Legal aspects of the sale process  

When a heads of terms have been agreed with the buyer, you will normally work with a solicitor to review the agreements which have been drawn up, and agree on a timescale  for completion. The agreements to be reviewed will include (but are not limited to) the following:

• Share / asset purchase agreement that cover the terms of the sale – i.e. exactly what is being sold, under what terms, and for how much. This will generally include non-compete provisions, warranties and potentially indemnities.
• Disclosure letter under which you will disclose any matters concerning the business that are inconsistent with the warranties to be given to the buyer.
• Ancillary documents such as board minutes approving the sale, shareholder resolutions, transfer documentation, director resignation letters and possibly settlement agreements waiving any employment claims you may have in relation to the family business.
• Exercise documentation, if the management team hold share options to be exercised on the sale.
• If the buyer is borrowing money to buy your family business any lender documents will need to be included in the sale process
• If any of the premises or equipment for your business is leased, the lease agreements will need to be assigned to the buyer if the transaction is structured as an asset sale or if the lease is in your personal name rather than the company’s.

Should you be considering the sale of your family business, our dedicated team is able to guide you through the process and advise you on the intricacies involved. Contact us for an impartial and confidential consultation.