Natalie is joined by fellow Mazars colleagues, Oliver Hoffman (national head of mergers and acquisitions) and Dave Hilton (corporate finance partner specialising in lead advisory and project management) to discuss succession planning and what family businesses need to consider before passing on the company. We delve into what options are available, what to do if you don’t have the right skills within the business, or a next generation to take over and ultimately lead the business in the future. There is no one size fits all approach to succession planning, every family and every business will have different needs, in relation to personal objectives, financial requirements, business legacy and heritage.
How to approach must-have conversations – 4m 34
Succession must be talked about but how do you bring it up and where do you begin? Dave and Oliver tell us that it’s all about understanding what you want to achieve and when. Identifying personal and family objectives is key. This then opens up a whole host of discussions about people – do you have the right people in the business right now? Is there anyone in the business with the ability to take on leadership and management responsibilities, and is there an appetite to take the business forward, either in the family or within the wider management team? This then leads on to a discussion about what options are available.
Why it’s important to have a clear succession plan in place – 7m 16
A succession plan enables the family to evaluate what's important and at what stage that plan needs to come to fruition. But it's not just about the financial aspects. The succession plan has to touch on the family identity, wellbeing, what’s fair and not being divisive. Because often within family businesses, as the tree gets ever bigger, so does the potential conversations that need to happen with different members of family, different entitlement, different working relationships within the business and it becomes much more complex. By having a clear, articulated succession plan, it helps to alleviate some of those concerns and some of those potential problems before they even arise. Essentially, it creates a platform to protect the value and the business.
COVID-19 and the effect it has had on business owners – 12m 03
The last few months have been challenging for everyone; however it has given a lot of time for business owners to reflect. This in turn has led many to consider if their business is equipped for the next stage of growth, if they need to upskill and move in to markets, and for some it may be a time when they think about accelerating their exit, or at least providing the family with financial security by de-risking.
Having the right skill set for the new normal – 15m 59
Innovation is one thing the next generation can bring to the table that will help the business move forward. As well as being able to provide different ideas, challenge existing ways of working, engage the wider team and focus on new markets. If your business isn’t quite up to date with a particular skill set, then consider bringing someone into the business or having a joint venture with another business who can add value to your product or service offering.
No next generation? What other options are there? – 20m 20
Management buyouts have lots of different forms from vendor-initiated management buyouts, where the vendor controls the process, to management buyout, looking at the second tier, to a two-stage buyout, where you do it in segments. So there's lots of opportunities. EOTs, employee ownership trusts, are really a growing trend, and lots of people are becoming aware of that potential John Lewis type ownership structure moving forward.
Management buy outs and employee ownership trusts – 23m 41
The key with management buyout is, it's a private arrangement, therefore people won’t know that the business is for sale. Pride can be important for family businesses so having a private arrangement is an ideal scenario. Plus, its likely that you already employ the people who are best placed to run your business.
An employee ownership trust, an EOT, is effectively a management buyout too. It's just the structure that the management buyout is achieved by. Effectively, an EOT is selling your business to the employees. There's often the thought that it has to be split equally between all the employees and that's not the case. So there can be different groups of employees that have different ownership structures.
Top tips for considering succession planning – 32m 06
Be ready, consider your business in the eyes of a buyer, what would you find attractive and what would concern you? And how can you improve this? Its important to act now to be sale ready because you never know when a buyer can come knocking.
Mazars
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In 2018, we launched our first Family Business survey in partnership with Family Business United. The survey revealed the challenges, opportunities and issues that family businesses are facing on a daily basis. And whilst the specific detail may change because of external factors, such as Brexit and now the global pandemic, it became clear that there are a number of issues that family businesses will always face, so we wanted to continue with our research in 2019 with a second survey and our 2020 survey will be published this Autumn.
To view the Family Business Survey 2019, click here
To request a copy of the Family Business survey when it is released, click here
Natalie Wright (00:03):
You are listening to the Exploring Family Business podcast, brought to you by Mazars, a resource of insights, information, and knowledge sharing from family business owners, their advisors, and key individuals involved in the day-to-day running of a family business. I am your host, Natalie Wright, head of family business at Mazars UK, and having worked extensively with family businesses for a number of years I'm keen to support this valuable sector of our society. At Mazars, we believe there is nothing more personal than a family business. Every family and every business are unique. So we look forward to sharing a number of interviews, conversations, and panel discussions with you each week, as we explore what is top of the agenda for family businesses in the UK. Now onto this week's show.
Natalie Wright (00:53):
Hello and welcome to the final episode of our first series of the Exploring Family Business podcast with Mazars. I'm your host, Natalie Wright, and on this week's show, we'll be discussing succession planning. Many of our guests have shared their experience of succession planning, mainly focusing on family dynamics, their legacy and their values. We know it's often referred to as the elephant in the room, the topic that some families just don't want to approach, or quite simply don't know how to start a conversation.
Natalie Wright (01:22):
In episode one, Mairi Mickel explained how she helps family businesses address succession, particularly with these difficult conversations, and why it's important to view it as a process and not a one-off project. However, today we want to look at what practical things family businesses need to consider when they're thinking about succession, and beyond that, what possibilities are open to them if simply passing the business onto the next generation of the family isn't a viable option.
Natalie Wright (01:50):
I'm delighted to be joined by two colleagues today who have a wealth of experience in helping family business owners navigate through these issues. We have Oliver Hoffman, national head of mergers and acquisitions at Mazars, and Dave Hilton, a corporate finance partner specializing in lead advisory and project management. Thank you both for joining us today. It's great to have you with us. Oliver, let's start with you. Can you give us some background about your experience and the type of family businesses you've worked with?
Oliver Hoffman (02:18):
Sure, thank you. So I've been working with clients, particularly family businesses, for the last 27 years, working with second, third, fourth, fifth, and often sixth generation family businesses on their succession plans and what do they do next? Where do they go? And helping them realize and achieve their objectives.
Natalie Wright (02:42):
Dave, same question to you. Can you give us some background about your experience and the type of family businesses you've worked with?
Dave Hilton (02:48):
Not quite as old as Oliver, so I've been working with family businesses for about 15 years on the advisory side, working with a range of different family businesses. The overarching thing around family businesses, the term family is different for each business and the definition of how they define what family looks like is very different.
Dave Hilton (03:09):
So we've worked with fourth generation businesses that are looking to pass down the legacy to the next generation. We've worked with businesses that have come to the end of that family hold of the business, that's looking at, actually, what's the next stage and what does the best buyer look like for their business? Which is hugely emotive and hugely important, not just for the people running the business, but for their legacy and how they're viewed in the community.
Oliver Hoffman (03:35):
Just actually to add to Dave comments there, the concept of family business and succession is different now to what it was 10, 20 years ago. So going back in time, there was an expectation that a child would pick up from parents in the business. That's much less prevalent these days. A lot of younger people want to do something different, want to do their own thing, and that leaves succession in family businesses an even greater challenge now than it ever has been.
Natalie Wright (04:07):
I think you're right, Oliver. Actually, this is something that we've explored throughout each episode. So what does succession look like to each business? It can be very different. In our second episode with Dunsters Farm, they spoke about, actually, their parents encouraged them to go out and seek another career. They did actually end up coming back to the family business in the future, but that's not always the case with a lot of family businesses.
Natalie Wright (04:34):
Having thought about what's been said in the first series, and the fact that succession is so key to every family business, we still find that it's the most difficult subject for family businesses to address. That's because it often involves having those really open and honest discussions, so not just at a business level, but also on that personal level. And for the first time, I see it with a lot of my clients, some family members need to really open up about their intentions for the future. For some, it might be the first time that they've actually really considered what handing over the reigns to someone else might be like. I mean, when you're working with clients, particularly for the first time, how do you approach those type of conversations, when you're talking to someone who might have run a business for many, many years, and then now thinking about, do they hand it over to someone else?
Oliver Hoffman (05:25):
Well, it's worth just actually thinking that we work with family businesses and non-family businesses. The one thing you see more with the family business is much longer term planning. More corporate entities work to two, three, and seldom more than five year timelines. Family businesses often think longer term. So decisions about change, and decisions about a plan for the future, take a long time in their creation.
Oliver Hoffman (05:51):
So really, I'd start with the question of what does somebody want to achieve and why they're wanting to achieve it. That opens up a whole host of discussions about, invariably, people ahead of the business, because it's people that run, people that dictate, a business. But what do the individuals want to achieve? That's a starting point then to look into what options are available. The options are always different from every clients' perspective.
Dave Hilton (06:17):
Yeah. Just to add to that, I think part of the conversation with clients is really trying to understand their identity, and not in terms of their identity as a person, but marrying the family identity with the business identity, because often they are more intertwined than what they probably think. That decoupling of the family aspect and their identity with the business identity is often a hugely important factor in evaluating what options they have and potentially the time it's going to take to put in place those succession plans to enable the family to understand what life could look like potentially without the business, or not working so hard within the business, and really understanding on a personal level, from the family's point of view, what that needs to look like. Because often the mistake can be made of just trying to identify the business asset as a standalone asset, but it's really not. It's more entwined into the very family fabric.
Natalie Wright (07:16):
Yeah, I completely agree. The personal aspect is absolutely key. I think looking at 2020 and where we are, and what's happened this year kind of crisis management side, we see that family businesses are still facing two very big challenges that existed before the pandemic and that will always exist, and really, do they have the right people in the business right now? So that could be themselves, family members, employees. And do they have the right people to pass it on to? Both of those have a personal aspect and they're not mutually exclusive, obviously, but we've found by considering both points, it really does change the perspective of what a family business needs to focus on as they start to either implement or review their succession plan. Dave, on that, if I can come to you first, why is it really critical for family businesses to have a clear succession plan in place?
Dave Hilton (08:10):
Working with family businesses a lot, what we often find is that their main asset is typically, from a financial point of view, locked into the family business. Not withstanding some of the good work that our financial planning or their financial planning advisors may do to spread the wealth that's been extracted over the number of years, but the majority of the wealth sits, whether it's in the IP, the intellectual property, the goodwill of the business, and really understanding that the value, where it sits, where it sits to them, and putting in place a succession plan enables family businesses to protect. It runs through the main ethos of how we like to try and advise our clients is looking at how to protect, how to pass on, and how to realize.
Dave Hilton (08:56):
Having a succession plan covers off these three areas and it enables the family to evaluate what's important and at what stage that plan needs to come into fruition. But it's not just about the financial aspects. The succession plan has to touch on the family identity, wellbeing, thinking around being fair and not being divisive. Because often within family businesses, as the tree gets ever bigger, so does the potential conversations that need to happen with different members of family, different entitlement, different working relationships within the business and it becomes much more complex.
Dave Hilton (09:32):
By having a succession plan, and bearing in mind, succession plans can change because of events that may happen within the family or within the business, but by having a clear, articulated succession plan, it helps to alleviate some of those concerns and some of those potential problems that they could see coming. Essentially, what it does, it creates a platform to protect that value and the business value for the family's benefit.
Natalie Wright (09:59):
That ability to review, adapt to change, that is absolutely paramount. This year more than ever, we have seen that, which is why we're talking about, it's a process. It's not a simple one-off project. You don't just do a succession plan, put it in a drawer and never look at it again. It's not just a back up plan. It's something that you should almost live and breathe by, to an extent.
Natalie Wright (10:24):
But Dave, what issues have you seen for family businesses if they don't have a succession plan in place? I don't mean just in terms of how the business runs and the dynamics between the individuals, but also that financial impact it can have on the business.
Dave Hilton (10:37):
It touches on a point I mentioned before around things can change. So businesses that don't have a succession plan or family businesses that don't have that in place, an event can often change the way that the course of events need to happen for a family business. These can be events such as pub conversations. We've all had it with clients where their best mate that owns a family business has just sold out for X times, it's a really good time to sell, and it starts changing the way that they potentially think around it. It may change the way that they approach how they adopt their business activities.
Dave Hilton (11:14):
Events within families can often have a huge impact, and these can be great events, or it can be potentially sad events where bereavements happen, and it can completely change the focus of a family business. If there are not succession plans that have been articulated and communicated... I think that's also a really important point as well. It's the communication of those succession plans. So either people within the business know what's happening or people within the family know what's happening. So if there is an event that changes the natural course of the path, and COVID could be a very poignant issue, then people that have an impact in terms of driving the business forward can lose sight and lose focus. That can change the financial aspects and it can change the value aspects of how that business can be viewed in the market.
Natalie Wright (12:03):
Picking up on the COVID point and not to go into detail about it, the last few months have really shown that it's all hands on deck to keep businesses afloat, to keep them able to tick over, at least over this period. Do you think this has led to some business owners questioning if they do have the right people or right skills in the business to lead it? Do you think they might be questioning themselves and their own abilities about future leadership? I mean, Oliver, what are your thoughts?
Oliver Hoffman (12:31):
So, as you said, the last few months have been challenging for so many people, but once we've come through, and most businesses have, the panic to a realization and stability in the business, it's given a lot of time for reflection, time for thinking about the future and what matters to people. That has opened up, certainly in discussions I've had with clients, a whole different level of thinking, as in, "We've got through this. What do we do next? And what do we want to do next? What have we in our business? What is our business? Where do we want to go with it?" Then that starts to bring about questions about people, about teams, about succession.
Oliver Hoffman (13:15):
Actually, what we've found also is some of those succession conversations have been prompted. This is quite common, actually, to get prompted by a third party making an approach, an expression of interest in buying a business. It forces people to think, "Actually, is now my time? Do I want to continue? Do I want to pass the business along to the next generation, if the next generation wants it? Or do I take the opportunity with someone knocking on my door to consider whether now is my time?" That's happened more and more recently as people think, people have time to reflect, recognizing that we've seen a period where the ordinary course of business has been anything but ordinary.
Dave Hilton (13:59):
Yeah. I mean, just to add to that as well, I think two other factors that feed into that is pride is a huge factor. Often, family business owners are incredibly proud people of what they've achieved, what they've built, their commitment to their staff, their suppliers, their customers, hugely proud people. But also align that with energy as well. Having to rebuild a business takes a hell of a lot of energy and whether that's within the family or within the people that sit around the family, really needs to be assessed.
Dave Hilton (14:34):
Because, one thing that we've definitely seen is that businesses with high energy levels and people that have a huge commitment to the cause will generally do well and generally work to a solution and come out the other side well. Whether business owners and family owners have that same energy to potentially move the business back to where it was pre-COVID is often questionable. Energy and pride, they can sometimes conflict with each other. And really understanding how to unlock what's the best route forward can often be driven by other people or fresh people coming into the business.
Oliver Hoffman (15:07):
It's worth saying, actually, that in periods of challenge, fractions in a family can open up. Let's all be honest and reflect that doing business with our family is not the easiest things to do. I couldn't be in business with my mother, I'd strangle her! So times of change expose challenges amongst people that have been manageable in good times, but in harder times, they come to the fore and one of two things can happen, either they can be addressed or those cracks can be papered over. I think in those scenarios, people decide which path do they want to go down? Do they want to reflect that there are challenges and actually the family business may have achieved its objectives, but time to do something different? Or do they continue and march forward as normal?
Natalie Wright (15:59):
Change is absolutely pivotal, isn't it, and without a doubt, inevitable? Technology, to a large degree, has completely changed the way that business is being done possibly forever after this year. Is there an opportunity for a family business who is thinking about a change to accelerate the involvement of the next generation and to consider about if there's a skill set in that next generation that may be better suited to whatever this new world might look like in which we're going to be operating?
Dave Hilton (16:29):
Absolutely. I think one of the key things is innovation and what the next generation can bring is innovation and different ideas, and not necessarily walk the same path, but think about things differently. Giving them the opportunity to have an impact, to innovate, to continue with that engagement, is massively important. I think one of the things that experience teaches us all is what not to do, not necessarily how to do it better or more efficiently.
Dave Hilton (16:56):
And you just look at some of the aspects of innovation. Social media is probably one of the key marketing tools now that lots of businesses use. Many family businesses, the owners, the patriarchs, may not have that skill set or knowledge of those certain markets. So it's massively important to try and align that innovation, but also try and align, potentially, the ownership of that innovation as well and how does that sit within the family businesses? Is it time to align the potential ownership of family businesses away from the previous generation into the next generation's arms, to be able to give them the real impetus to go and make that change?
Dave Hilton (17:35):
Also, if the innovation or if the technical abilities aren't there, think of how differently family businesses can do it. We've got one where we're working with a client at the moment that has identified a potential, I wouldn't say weakness in their business, but they haven't quite got the skill sets. So what they've looked to do is they've looked to do a joint venture with an upcoming tech business in their similar markets to use the experience, use the guy or use the legacy, use the brand that they've built and spent years cultivating, but match it with a technology solution that enables them to address a new market, so they don't get left behind. So it's not necessarily just thinking vertically, it's thinking around, "Actually, how do we best impact the market and what's the best growth strategy that we can employ?"
Oliver Hoffman (18:20):
I also think if you take that a stage further and think about the question Natalie asked a few minutes back about, "Are there the right people in the business?" it's about thinking as a blend. So a family business is not binary. It isn't either owned by a family or not. There are many hybrids where you bring together new people from outside of the business with family, such that the next generation becomes a blend of the two. That's quite a good way of enabling continuing sort of a family business, at least partially in the family, but getting some fresh perspective that's brought into the business from the marketplace.
Natalie Wright (18:56):
I think that's a really good point to outline. What succession looks like to the next generation might not be what it has been previously. You outlined there a joint venture. You wonder, would that family business ever have thought about going down that route maybe two, three, four years ago, Dave? I don't know if you ever got in discussions, but is it almost as a result of what's happened this year, but actually it's something that will stand them in good stead from a personal and family perspective, but also will it allow the business to continue and grow over the longer term?
Dave Hilton (19:30):
Yeah. The challenge came from, actually, not the senior leadership team, but the people that worked in the business and the conversations that they were having with the ownership team. Quite quickly, it became apparent that the opportunities of aligning a technology solution with the core skill sets and the connections that they have in the market could almost transcend the family business's value now.
Dave Hilton (19:54):
So it's being really adaptive to, open to, new ideas, but doing it in a way that doesn't necessarily put the family legacy or business at risk, but doing it in a way that can open up new opportunities and give everyone the same drive and the opportunities to push forward. Because, the one thing we are seeing is that every market is evolving and every market is changing. Having a tech enablement factor to it is becoming more and more and more important.
Natalie Wright (20:20):
So moving beyond that succession to the next generation then, let's say there is no next generation or there's no appetite to take on that challenge. Dave, what other options could family businesses consider?
Dave Hilton (20:35):
There are lots of options open. I think one of the things that we'd like to do first is take a little step back and really go back to those core principles that we talked about at the start of this podcast, where really understanding what factors are important for the family owners. And not withstanding, there might not be the ability to pass it on to the next generation, but things like what the name above the door looks like now and in the future. Again, going back to that pride factor, it can be a hugely emotive thing for business owners to have their name above the door. Are there any family involvement? And that, again, laboring on Oliver's point, that's not necessarily immediate bloodline family. But what does family constitute? If you've worked with people for the last 20, 30 years, they may be deemed to be quasi-family because you know everything about their family, as is the case with lots of family businesses we work with where owners walk around and know pretty much everyone on the shop floor and know lots about them and it's integral, it's part of their life.
Dave Hilton (21:35):
One of the questions that we always ask is, "Do you need the money?" It's quite a perverse question to ask is, when you're passing the business down, "Do you actually need the money? Do you want the money? What are you going to do with the money?" Often, evaluating these types of factors and looking at the legacy issues can identify which route could potentially be a route forward. I think one of the things that is key is the options. What options are available? Lots of businesses don't really know the full suite of options that are available to them. So you can talk around selling the business, and I think that was pretty apparent. You can talk around, okay, listing, and people look at that and think, actually, if they float on a stock exchange, that's only for very, very, very big businesses. That's not always the case, and that can be a way of realizing some value, passing it down to the next generation.
Dave Hilton (22:20):
But then you look at management buyouts. Management buyouts have lots and lots of different forms from vendor initiated management buyouts, where the vendor controls the process, to management buyout, looking at the second tier, to a two-stage buyout, where you do it in segments. So there's lots of opportunities. EOTs, employee ownership trusts, are really hitting the market, and lots of people are becoming aware of that potential John Lewis type ownership structure moving forward.
Dave Hilton (22:48):
One of the things we are seeing, and this is something that we see in Europe as well, that very successful family businesses that want to retain that legacy, they don't necessarily just have to exit, or sell, or change the dynamic or culture. They can often do that partial exit where they effectively become a private equity firm. So they become a family office where they invest in their own business. There's ways to do that, that you can retain the ownership to a degree, subject to tax planning and all the good things that need to go on, but you can still have an impact and still have your name over the door, still drive some of the strategies, still be a key part of the future, but letting other people compliment the direction. So there's lots and lots of options available to family business owners to either realize the value, stay involved and basically dictate what they want to do for the rest of their days.
Natalie Wright (23:41):
Yes. The key is the options, isn't it? The more options you have, the more you can flex things to your personal objectives and the family objectives. Rather than thinking just a sale of the business is the only route, actually look at what you want to achieve and how can you look at those different options to have them fit in with your objectives? Just picking up on one option that you mentioned there, a management buyout, or MBO, as we call it. Would one of you like to explain what it is and some of the points that can work well for a family business? So not in technical detail, but actually, why does a management buyout often work well for a family business?
Oliver Hoffman (24:18):
As Dave described there, there are a whole suite of options available to a family in terms of their succession planning, on the assumption that they move the business outside of the family. So the most common two are management buyout and/or a trade sale. I think there's a key distinction between the two that often leads people towards a management buyout, and that is, it's a private arrangement. It's an arrangement between the family selling and the management team in place buying. I guess you could look at it as a trust relationship or a better the devil you know relationship. But it enables those in the business who know it to take ownership of it from the family who thus far have owned it.
Oliver Hoffman (25:06):
There are, clearly, some sensitive discussions that'd take place there in terms of pricing. What's the business worth? What someone's prepared to pay for it. Arguably there, if one person is prospering, the other one is paying for that prospering. But that's a discussion that can usually be got through fairly easily. Then there's a requirement to find the finance to enable that to work. That can come from multiple sources, often from a bank, often from a private equity house. Or what we find often also is the family actually leaving some money behind and trusting the management team, because they've known them and worked with them for a number of years, to pay for some of the business over a period of time to make that work.
Oliver Hoffman (25:52):
But key there with a management buyout is it's a private arrangement. People don't need to know that the business is for sale. Dave talked about pride some while ago, and pride is important. Some clients, we find, are very happy to talk to the marketplace about their business. Others prefer a private arrangement. A management buyout is an ideal scenario for that private arrangement to occur.
Natalie Wright (26:16):
I guess there's some similar points on employee ownership trust as well, or EOTs, as Dave mentioned. So John Lewis is probably the most renowned that people can relate to. Without going into the technical points of what an employee ownership trust is, would it be worth highlighting why they are becoming more popular and why there's this growing trend around them, Dave, particularly in the family business sector?
Dave Hilton (26:41):
Yeah, absolutely. An employee ownership trust, an EOT, is effectively a management buyout. It's just the structure that the management buyout is achieved by. There are the rules and regulations that sit behind that. Effectively, an EOT is you sell your business to the employees. There's often the thought that it has to be split equally between all the employees and that's not the case. So there can be different groups of employees that have a different ownership structure within that structure.
Dave Hilton (27:11):
EOTs are becoming very attractive. There's a number of different reasons. One, lots of family business owners like to give back and like to give back the opportunity for people that have helped them along the way to benefit from future financial gains. There's also quite a significant gain for the business owner, the family owner, in the fact that EOTs are currently at quite attractive capital gains tax rates, and capital gains tax rates of about 0%, which is often very attractive indeed. Whether that stays or whether that gets changed post the autumn statement with what might happen to capital gains tax and changes in tax rates now, that's still to be seen.
Dave Hilton (27:52):
So it's going to be an interesting space, but EOTs are definitely a really good place where the structure of the business suits being passed to the employees and it doesn't suit all businesses. So you also have to think around, "What does the future look like? What pace does it need to go at? How's it going to be run effectively? What is my involvement? What's my family's involvement?" The family's involvement is often quite pivotal and quite key, where it may not want to fall outside of the family's ownership, where a management buyout may suit perfectly for a family business. So everyone doesn't participate in the share capital of the new venture.
Dave Hilton (28:31):
One of the things, just picking on Oliver's point as well with family businesses, we've worked with lots of family businesses that have gone down the management buyout route. But the overriding factor is that, let's say it's the fourth generation selling to fifth, they don't want to give it away. Part of the family strategy could be to crystallize some of the family business value and pull it outside of the family share capital to make sure that all the work they've done over the past X years is not now fully at risk in different sort of stewardship of that family business. Also, quite a few of the family businesses and family owners that we work with, where their children potentially work in the business, they want them to earn it. They want them to earn their equity and their rights, and they don't just want to pass it on. So that's where some structuring, some tax planning and some family planning around, "Actually, what does the charter of the family look like?" is really important to get that right.
Natalie Wright (29:26):
I'd be interested to know, actually, all those points that we've covered off, have either of you seen any family businesses change or accelerate their succession plan this year, and particularly if they had a plan to proceed down one route and you were helping them with that, and all of a sudden they've actually gone down a different route?
Dave Hilton (29:44):
Yeah. We're working with a family business. We're actually working with the main family business and the daughter's business as well. Originally working with the daughter's business, looking at funding options to facilitate the growth opportunities. When speaking with the main family business, they were looking to get some funding in themselves to potentially open a new warehouse, new factory. Now, as all COVID's happened, they've done quite well because they've quite quickly started manufacturing hand sanitizers. So numbers are looking good and the business has continued to perform well.
Dave Hilton (30:18):
But actually, with potential changes in capitals gains tax and potential changes in the way the market's going to operate, the main sort of family member that runs the business is thinking, "Well, I don't want to be doing this forever, and I potentially may want to crystallize some value in the form of cash or in the form of loan notes," basically moving it outside of the share capital. Potential changes in capital gains tax has helped to accelerate that thinking because it's still a bit of an unknown at the moment, but noise that Rishi and some of the government are mentioning, that potentially IHT and CGT will be looked up. So can we start formulating plans to potentially lock in attractive capital gains tax rates now, but without affecting the business moving forward and without putting too much financial pressure on the business? There are ways to do that without getting too technical.
Oliver Hoffman (31:09):
From my perspective, in the last year I've seen a couple of situations. So I think there's usually a catalyst to prompt some form of succession event. That can be a death, it can be a disagreement, an approach from a third party, and latterly, and very recently, in fact, as Dave just talked about there, changes in capital taxes or an expectation of changes in capital taxes. That is prompting people to think, "Is now my time?" We're having multiple conversations with clients and potential clients about that, that I don't think we'd have had otherwise. So it's forcing people or prompting people to think, "What do I want? Do I carry on with the business? And actually, if I do carry on with it longer term, might it be worth less to me because when I'm taxed on selling it, my proceeds reduce?"
Natalie Wright (32:06):
Thanks for that, Oliver. I guess part of it is also having the confidence to understand that plans can change and that, actually, if your plans needs to change because your objectives have changed, that's okay, but you need to make sure that you start thinking about it sooner rather than later. I am sure we've got lots of family businesses listening to this who are now thinking about succession, potential exit, perhaps in the future. If you each could share one tip that could help them prepare for this. I appreciate there'll be lots of tips, but if you could just share one, what would that be?
Oliver Hoffman (32:43):
So for me it would be, be ready. And by being ready, consider your business in the eyes of a buyer. If you were looking at your own business, what would you find attractive about the business and what would concern you about it? And reflecting what would concern you about it, think about how you can make change to some of those aspects to make it a business that if someone came knocking on your door, that you are ready to sell and ready to get a good price for the business.
Dave Hilton (33:14):
I'll try and give one. It's always difficult to just give one tip. I think it all fits in the planning. What we often say is, "Who is the best owner of your business?" Really thinking about, "Who is the best owner of your business?" That can be family, it can be others, but really doing a deeper dive in terms of thinking around, "What does the best owner for my business look like?" I think once that that thought process has gone through, it'll start spinning out into lots of different areas that we've talked about during this podcast. But, "Who's the best owner of this business?" Thinking around all the stakeholders, all the shareholders, "Who's the best owner?" I think formulating that as an idea will help drive that succession plan.
Natalie Wright (33:55):
Thank you both for your time today. You've provided some really valuable insight. So that does bring the eighth and final episode of the Exploring Family Business podcast with Mazars to a close. Thank you everyone for joining us for our first series. We do hope you've enjoyed the content and that you've been able to take away some action points to help you achieve your goals in your own family business.
Natalie Wright (34:17):
If you've enjoyed the series, please leave a review on iTunes and please subscribe. It will help us to continue extending our reach to support the family business community. If you'd like to know anything more about what we've discussed today, or you'd like contact details for our guests, they'll be detailed in the show notes. Until then, thank you for listening and goodbye.