Transferring a business to a family member
Running a family business successfully means reaching the right balance between the needs of the business and those of your family. This can be particularly difficult when you're planning how the business will carry on after you step down from managing it.
This guide will help you decide if family succession is right for your business and, if so, establish who is best placed to take over from you. See identify a potential family successor.
It outlines how to manage the succession process and its tax implications and explains why you should be clear about your future role in the business.
Is family succession the right option?
It may be your dream to keep your business in the family but you need to consider the commercial implications of doing so. It's important to balance your emotions with hard reality.
Long before you intend to retire, you need to ask a number of key questions:
- Does your intended successor really want to take over - or do they feel obliged to do so?
- Does your intended successor possess the right skills and attributes?
- Is someone else in the business - eg a non-family manager - better placed to take your business forward?
- Will nominating your successor set up conflict in your business - perhaps between individual family members or with other employees?
- Will family succession provide sufficiently for your future?
- Will family succession be tax-efficient? Read more about tax implications of family succession.
You need to consider both your management and ownership roles before coming to any firm decisions. It may be that instead of family succession you should be considering other exit options, such as:
- a trade sale
- a management buy-out
- stock market flotation
- winding up the business
Read more about how to consider your exit strategy when starting up a business.
It can help to involve a third party in these important decisions. For example, a non-executive director or your business adviser can provide objective advice.
One family successor or more?
The best way to hand your business over to your family is to nominate a single successor from among your offspring or other relatives involved in the business. This isn't always practical or realistic, however.
In making your decision you must:
- determine objectively who can best take your business forward
- aim to reduce the potential for future conflict
Successful communication with all family members is crucial to making any decisions.
Remember that there are other ways of being financially fair to your offspring or other relatives without involving them all in the future management of the business.
For example, you could take out a life insurance policy for those who won't benefit from inheriting the business. Or you could split your business' shares into two classes - giving full voting rights to your successor and restricted or non-voting rights to family members with no managerial involvement.
If nominating more than one successor is your chosen option you should ensure the co-successors have a similar vision of the business' future and a similar commitment to it. To limit the potential for conflict - which could even lead to the break-up of the business - it can help if you:
- determine separate areas of responsibility for each successor
- put in place formal dispute-resolution procedures
- appoint an independent board of directors
Identify a potential family successor
Any family member you nominate to take over your business must:
- demonstrate leadership skills
- possess the required skills and competencies to run your business
- be fully committed to the role
- have the full support of others in the business
It's important to conduct discussions early on with possible successors. To help you put personal issues aside when considering the commercial future of your business, ensure you hold these discussions on business premises rather than at home.
And remember that although you might dream of one of your children taking over, he or she may have other aspirations.
It can help to take advice on who is the best person for the role from an objective outsider such as a non-executive director, business adviser or accountant.
Your successor should have both strategic plans and a vision for your business - though you may need to accept that these may be different from your own. Skills that may, for example, have helped you set up your business won't necessarily be the same as those needed to develop it further.
It can also help if your successor has at least a few years' outside experience. This will introduce fresh ideas into the business and is likely to make them more acceptable to non-family employees.
Family succession: clarify your future involvement
One of the hardest things to do in business is to step down. It can be particularly hard if your business is a family one you have been running for years.
You can make things easier for yourself if you:
- clearly determine any future role you may have in the business
- accept that you're no longer in charge - though your advice and support will be invaluable, your successor may have ideas very different from your own
- plan other activities to continue to lead a fulfilling life after you leave the business
It can, though, still be hard not to interfere in the business if you are financially dependent on its success. If you're retiring, you may find it easier to take a step back if you have personal pension arrangements that are separate from the business.
Another way of achieving this distance is by arranging a family management buyout, in which family members - either alone or with outside help - finance a buyout of your shareholding.
Remember, it's very important your successor is allowed to assume their role freely. If they can't, they're likely to become frustrated and the business may suffer. It can help if you remember that change is often necessary for a business to develop successfully.
Manage the family succession process
The key to a successful management transition is effective succession planning. This process could start as much as 15 years before you intend to step down. It is good business practice to include a written succession plan within your overall business plan.
This should contain:
- your key goals
- a timetable of the transition stages - from identifying a successor to the staged, and then full, transfer of responsibilities
- contingency plans in case the unforeseen happens, such as your intended successor declining the role
It's particularly important that you allow your successor an adequate training period. This time can be used for on-the-job and/or more formal training. You should also include time for the development of business and leadership skills.
One way to manage the training programme is for your successor to gain experience in other businesses. This allows them to gain independence and bring fresh skills and ideas to the business.
You might also allow them to gain knowledge of all aspects of your business by spending time working in each area of it. A key advantage of this method is that the successor is also meeting - and possibly being trained by - your key personnel.
Also consider whether it's best for you to phase in your departure by gradually transferring some key responsibilities to your successor or possibly reducing the days you work in the business.
Remember - communicating your plan to your family and management is essential and will help prevent misunderstandings and future conflict.
Tax implications of family succession
Pass shares to family members tax-efficiently, maximising relief for Capital Gains Tax and inheritance tax
Think carefully about the tax implications of family succession.
Business Asset Disposal Relief
You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business.
Business Asset Disposal Relief was known as Entrepreneurs’ Relief before 6 April 2020.
Read more about Business Asset Disposal Relief.
Inheritance tax reliefs
You may qualify for business-property relief from inheritance tax if you sell or pass to relatives:
- your business
- an interest in your business - your share of a partnership, for example
- shares in your limited company
Find out more about inheritance tax reliefs.
Capital Gains Tax
If you dispose of your business to a relative, other than your spouse or civil partner, you may have to pay Capital Gains Tax on any gains made on these 'assets'. Note that the open market value of the assets of the business may be used in calculating the taxable gains if the disposal of an asset is for less than this value, or for something that cannot be valued.
Read more about Capital Gains Tax.
Succession planning in a family business - McKeever Hotel Group
McKeever Hotel Group is a family-run business based in Newtownabbey, which owns five hotels.
Eugene McKeever MBE founded the Group. He and his wife Catherine are Managing Directors of the company. Their daughter Bridgene Keeley holds the position of Marketing Director and their son Eddie McKeever is Operations Director.
Managing Director, Eugene explains how they successfully run the family business and manage succession planning.
How it started
"I have been working in the hospitality industry since the age of 12. I started washing dishes at Corrs Corner and then trained as a chef, which led to me holding the position of Head Chef for 11 years."
"In 1986, Catherine and I bought our first business, which was a small restaurant in Randalstown called Granagh House. In 1993, we returned to Corrs Corner as the owners. Four years later we added 30 bedrooms to the property turning it from a roadhouse into a hotel - this was our introduction to the hotel industry."
"Today McKeever Hotel Group has five properties: Corrs Corner Hotel, Dunsilly Hotel in Antrim, Adair Arms Hotel, Ballymena, Dillons Hotel in Letterkenny, and in 2017 we took ownership of the Dunadry Hotel and Gardens, investing £4 million and achieving a 4 star accreditation from Tourism NI."
Building on family expertise
"Eddie, my son, and daughter, Bridgene showed an early interest in the business. Eddie has worked in many hotels in Ireland and Scotland having studied Hotel Management. Bridgene entered the family business after completing her Business Studies degree. We have three additional children who have followed different career paths and are not currently working in the business."
Plan for the future
"Having a strategy is central to succession planning in a family business. We knew that family succession was the right option for us as our children, already involved in the business, showed a passion for running it in the future."
"The biggest challenge that we faced when starting the succession planning process was how family members would react, especially our children who weren't working in the business. We needed to balance protecting the business alongside maintaining the close family bond at the same time."
"At the beginning, it was very emotional, as you don't know how other family members will respond. Thankfully, everyone was supportive of the idea and agreed."
Seek advice and guidance
"When we decided that family succession was the right option for our business, we attended a course to help us fully understand how to best approach it and the steps we needed to take."
"We then engaged our accountant, who has handled succession planning for other family businesses, to help us start the conversations as well as guiding us through the process."
"We also engaged a solicitor for the legal parts. We continue to keep up-to-date with forums, workshops and seminars on family business and succession planning."
Document your plans
"In addition to engaging with specialist professionals to help start the process, we developed a family constitution. This document formalises the succession planning process. It includes details including, which family members will take over the business. We also created a shareholder agreement."
"These documents ensure that everyone is aware of the current plans in place from family members to the senior management teams. Ensuring a gradual handover is important for us."
"To help plan for a smooth transition to the next generation, we are open with each other as a family and continuously communicate."
"We have formal Board meetings to help us reach decisions. Outside meetings, we constantly chat with each other about things happening within the business over a cup of tea at work or home."
"We also run two annual family meetings. These meetings are for every family member, those working in the business and others sitting outside the daily activity. This is where we keep everyone up-to-date on company plans."
"I have heard so many sad stories of how succession has ruined family bonds. We didn't want that to happen to us. I am glad we started it early."