Succession planning marks a critical milestone in the life of any family-owned business. For business owners looking to retire while preserving the company’s legacy within the family, a family buyout offers a seamless and effective solution.
What is a family buyout?
A family buyout involves passing a business on to the next generation while securing a full or part cash exit for the current owners. Typically, this process entails incorporating a new holding company, owned by the next generation, to acquire the shares of the existing trading company or group. The purchase price can be funded using available cash reserves within the business or bank debt, with any remaining balance structured as deferred consideration, enabling repayment over time as the company generates profits. A successful family buyout requires thoughtful planning, particularly around the allocation of shares within the new holding company. This ensures that ownership is passed to trustworthy individuals while mitigating risks such as marital disputes or claims that could disrupt the future stability of the business.
Why should I consider a family buyout?
- A family buyout offers significant financial and tax advantages. The retiring owners receive proceeds reflecting the full market value of their shares, rewarding their years of dedication and effort. For businesses that lack sufficient liquidity to fund the full exit upfront, deferred payments or loan notes can be issued, enabling a structured and manageable transfer of funds while maintaining the financial health of the company.
- A key aspect of a family buyout is the availability of Business Asset Disposal Relief (“BADR”). For qualifying trading companies or groups, BADR currently reduces the capital gains tax rate to 10% on the first £1 million of gains per shareholder, enhancing the overall tax efficiency of the transaction. This rate will rise to 14% from 6 April 2025 and 18% from 6 April 2026.
- Additionally, the family dynamic allows for flexibility in structuring the transaction. The consideration can be tailored to suit all parties, whether through immediate cash payments, deferred instalments, or loan notes, depending on cash flow and the shareholders’ preferences.
- Finally, the exiting shareholders also have the opportunity to continue their involvement with the business as consultants or employees, should they choose. This arrangement provides valuable continuity, allowing them to share their expertise and support a smooth transition for the new owners.
Client Case Study
We recently assisted a family business with a successful buyout that highlights the benefits of this approach. The clients, a couple nearing retirement, owned shares in a trading group alongside their adult children. They wished to step back from active involvement while ensuring the business remained under family ownership.
To facilitate the transition, a new holding company was established, fully owned by their children. This entity acquired the parents’ shares at full market value, with the purchase price partially funded using the group’s cash reserves, and the remaining balance deferred as loan notes to be repaid from future profits.
By carefully planning the transaction, the parents were able to utilise their BADR lifetime limits, reducing the capital gains tax rate on the first £1 million of gains to 10%. This not only ensured a tax-efficient outcome but also provided the parents with financial security and peace of mind, knowing the business would remain a family legacy.
Final Remarks
A family buyout presents a highly effective and tax-efficient method for business owners to transition out of their company while ensuring the continuity of the business within the family. By leveraging strategic planning and flexible payment structures, family buyouts provide a clean exit and long-term stability for both the retiring shareholders and the next generation. With the right approach, family buyouts enable businesses to thrive under new leadership while safeguarding the legacy and interests of all involved.
