Dear Goldwyns – I have run my family company successfully for around 30 years, but am now thinking about retirement. I have approached a number of agencies selling businesses, but have been disappointed with the offers being made to acquire the business, which on enquiry don’t actually realise what appears to have been on the table on day one. Furthermore those making the offers simply want to transfer the turnover of the business to the buyer’s facilities, potentially leaving my loyal and hard-working staff redundant in a short time. Any ideas?

Arthur Millman answers:

It may well be that behind you is an experienced management team who, given the opportunity, could purchase and carry the business forward. You comment on their loyalty, so I assume they may well have a detailed knowledge of the business and direct contact with customers. From the customer point of view the business would remain fundamentally the same.

Obviously the new management team would have to show willing by injecting some funds into the firm and a management buy out can be achieved by the next generation simply buying the shareholding of the existing shareholders. However, there is an extremely tax efficient way for the ‘next generation’ to acquire the business by a company buy-back of shares this can be done by the new management team acquiring a small shareholding and the company itself purchasing and cancelling the bulk of the shares. This process involves the retiring shareholders selling their shares to the company, which are then immediately cancelled, and thereby the small shareholding owned by the next generation makes them 100% owners of the company. This is the best and most tax-efficient method. The tax efficiency arises because the company is paying for the share capital of the former owners out of profits which have been subject to corporation tax at 20% [or potentially less], whereas if the next generation acquired the shares, the capital payment may have been out of income taxed at 20%, 40% or 45%, plus potentially National Insurance or even the new “dividend tax”.

There are a number of hoops to jump through to get clearance from HMRC that it is for the benefit of the business, but these should not be insurmountable and it is always good practice to apply for an advance clearance from HMRC. It may well be that the retiring shareholders will be owed money by the new shareholders, who themselves are owed funds by the company. Clearly there is an element of risk, but with appropriate guarantees those risks can be minimised, and after a few years the new shareholders should have a company that they could not have expected to own, and ought to be free of debt. There is nothing better to inspire a management team to work hard for the success of a business than for that business to be their own.

The process does require some specialist knowledge, and if your accountant has had little or no experience of dealing with such a transaction, it is worth taking the appropriate advice to ensure everything is done correctly.

This article was originally published in the Southend Echo on 4 April 2017