September 17 2014 Latest news:
Friday, May 18, 2012
Two stories of high-profile local businesses selling out to major groups have been featured in the Eastern Daily Press in recent weeks – J&H Bunn, which was sold to American-based Koch Industries in March 2011, and Anglian Bus, sold to the national Go-Ahead Group in April 2012.
Is this, then, the beginning of the end for the independence of our local, family-owned businesses?
It’s certainly nothing new to see family businesses being sold to larger groups and this is often the preferred route if the family wishes to maximise the disposal proceeds.
It is not always just about the money. Sometimes it is the right thing to do strategically for the business – perhaps securing additional finance and management resources to enable expansion, opening up new markets, increasing buying power etc.
It is worth noting that while less than 10pc of family businesses make it successfully into the third generation, we still have plenty of long-established family businesses in our region which have remained with family ownership.
Jarrold, Bakers & Larners, and Start-Rite Shoes, for example, can each trace the history of their family businesses back well over 200 years.
There are a significant number of younger family businesses that are transferring into the second and third generations of family ownership.
If the incumbent generation have been fortunate enough to make sufficient provision for their retirement through pension funds or investments outside the family business, then sometimes a gift to the next generation is the natural route.
However, if the incumbent generation wish to extract some capital value, or continue to draw an income in retirement, then careful planning is required.
Access to bank finance for buy-outs of retiring family members remains particularly challenging and some family business owners who have been ‘sitting on their hands’ waiting for markets to improve are now deciding that as they cannot see any change on the horizon it is time for a different approach.
We are seeing an increasing number of mainly or wholly ‘vendor deferred’ buy-outs taking place, where the consideration is paid out of future profits over a number of years. This is particularly prevalent where the new owners are wholly or partly family.
Where the retiring gener-ation do not require a lump sum but simply wish for an ongoing income in retirement, it may be possible to achieve this by relinquishing equity and taking fixed dividend preference shares instead. Ongoing rental income from properties occupied by the business is another option often considered.
All of these require careful planning for income, capital and inheritance tax purposes and that is why we encourage our clients to start the planning process many years ahead. Balancing the financial requirements of the business and the retiring generation while mitigating taxes is a complex process.
We are certainly creating more imaginative ‘hybrid’ solutions to help the family achieve all their objectives on retirement of family members these days.
Certainly, I would not expect to see a decline in the number of family businesses remaining in independent ownership, providing they plan appropriately and take good advice.
Steven Scarlett is a partner at Lovewell Blake
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