As a tax consultant, my services are often engaged when clients have made the decision to transfer or sell their business.
A significant other proportion of cases which cross my desk involve business transfers that have occurred on the death of the predecessor. In both of these situations circumstances can be less than ideal.
From a tax perspective a transfer of a business foisted upon either a beneficiary or a transferor without a planned lead in time can mean tax reliefs and exemptions might not be available or might be restricted due to a failure to meet relevant criteria.
An example might include a would-be transferor being unable to avail of Capital Gains Tax relief where the business was not carried on for ten years prior to the transfer.
Similarly, a child might not be able to avail of stamp duty exemption on the transfer of a farm if there are over 35 at the point of transfer.
As an accountant, the focus can be very much about looking in the rear-view mirror preparing accounts and a tax return for the year gone rather than looking ahead to how the business is evolving and transitioning.
The best time to start planning the transition of a business is now. Whether you have a successor or not, it’s useful to get to grips with your options.
What are the minimum requirements that you need to meet to make sure that:
(a) You can sell your business at a future point in time in a tax-efficient manner;
(b) Allow you to transfer your business in a tax-efficient manner should a successor be identified;
(c) Identify what tax-efficient strategies can be put in place in the event of your untimely death.
For the latter, an example might mean the inclusion of a discretionary trust within your will which would allow people you appoint trustees to take over your business and ultimately enable the tax-efficient transfer of same in due course.
Apart from the tax considerations a planned approach the sale or transition of a business can create a smooth environment that will reduce stress, reduce confrontation, avoid delays and ultimately end in a better outcome.
On transfers to successors, I have on more than one occasion observed owners dismissing the proposition of the transfer of a business to the likely successor on the basis that the individual was incapable of taking on the responsibility.
In many cases, it’s ironic that the business owners themselves might have inherited the business at a very young age by modern standards.
Building up a successor to take over a business is very much the joint responsibility of both the transferor and the successor.
It’s easy to forget that neither the business owner nor the successor are likely to have any previous experience, training or coaching on how the responsibilities of a business should be transitioned.
It’s no surprise then that procrastination can mean the transition of a business ultimately happens in one burst at a point when the tax relief window is about the close, or on the passing of the business owner.
It’s also no surprise that the ambitions and progression of a would-be successor are quenched if they are not blooded.
For a successor to take on the responsibility they must be given the opportunity to take on responsibility.
The vast majority of businesses are small enterprises where the business owner effectively manages everything from invoicing to purchasing, supplying services and goods to customers and organising other staff members.
These business owners are by their nature micro managers and in most respects that is an exceptionally good and important trait. Small business owners have their finger on the pulse of every part of their business.
The downside though in these situations is that the business owner can find it hard to step away from managing elements of the business.
Transitioning responsibility can start at a small element of the business. For a coffee shop owner, responsibility for the Thursday menu could for instance be handed over, for a tillage farmer responsibility for cropping in one or two fields could be handed over.
A conscious effort must be made by the business owner to resist over-supervision or worse still over-criticism once the baton of responsibility for that element of the business has been handed on.
A structured approach to discussing the business will avoid confrontation.
An offer of help in a time of crisis will be better received than a reminder of the cause or worse still an allocation of blame.
It’s a basic human instinct to react and perhaps fly off the handle in times of great stress, overriding that emotional response takes hard work.
One piece of advice I often quote is as follows ‘if your coming with a problem come with a solution too’. It’s easy to identify problems, much better to offer solutions.
Setting structure means proactively allocating time during the week for organising and discussing the business rather than engaging in a review as the crisis is unfolding. Transitioning a business successfully is much more than ensuring the tax liabilities on the transfer are minimised.
Making sure the business will continue to grow and be successful and that relationships remain intact warrants attention. Getting advice early on both matters is the key to success.
Kieran Coughlan is a Chartered Certified Accountant and Chartered Tax Advisor.