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Business owner with no natural successor uses employee ownership trust to give stake to management team

Date: 03 Feb 2016

Citywealth

Deborah Clark, partner at Mills & Reeve, talks about a case where a client didn’t want to sell his successful business despite not having a family member to take over the reins.

What interesting cases of succession planning have you been dealing with recently?

I have advised the owner of a Midlands-based firm, in the interior fit-out and retail display sector, on the succession of his business. There was no family member in a position to take over the reins but the client was clear that he did not want the business sold. The company employs over 400 people, had very low staff turnover and had a very strong management team. The culture of the business was typical of a family firm as it has a strong sense of loyalty to the workforce, had seen many employees progress through the business to senior positions and shared profits with the employees through a bonus scheme. The owner and management team wanted to ensure that as little as possible changed internally whilst securing the long term future of the business.

The solution to the client’s objectives was to sell a majority stake in the company to an employee ownership trust which will retain the shares for the benefit of the workforce. This transaction took advantage of new legislation introduced in Finance Act 2014 which meant the gain on the sale of shares realised no capital gains tax. New legislation also enables the company to pay cash bonuses of up to ¬£3,600 p.a. to employees free of income tax. The management team will continue to run the business and the family, who retained a significant holding, will continue to participate by receiving dividends.

What should UHNWIs be aware of when transferring a business to their children?

Before any transfer of a business to family members, UHNWIs must ensure they consider asset protection measures. I would suggest as a minimum they review their Articles of Association, which are written rules about running the company agreed by the shareholders, directors and the company secretary, to ensure appropriate restrictions are included on share transfers. I would also strongly recommend they consider a shareholders’ agreement and a clause requiring their children to sign up to a pre or post-marital agreement that at least seeks to ring fence and protect their shares in the business before any shares are gifted to them.

What trends do you see in the industry you can tell us about?

I am convinced that we will see a steady growth in the use of employee ownership models over the next five to ten years. As a firm we are already seeing more enquiries in these structures and with the success of firms like John Lewis and the new tax reliefs introduced, I see no reason why the interest will not steadily gather momentum. I particularly feel that this is an option for family owned businesses where there are no family members able to take over the reins.

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