29 June 2021

Building an enduring legacy following the sale of a business: George Mitchell speaks to Transmission Private

In June's edition of Transmission Private's The Lede, Private Client Partner, George Mitchell, talks about the challenges business owners may face when selling their business and how they can overcome them.

The full article, entitled 'Building an enduring legacy following the sale of a business', was first published in Transmission Private and can be read in full below.

Often selling a business is a key achievement for an entrepreneur and marks the culmination of a lifetime of hard work. Realising substantial sums on a business sale opens opportunities for the seller to pursue their passions, leverage their experience and invest in other business ventures, or establish structures for passing wealth on to the next generation. However, it can also give rise to a number of challenges that the seller will need to navigate.

Challenges potentially faced when crystallising wealth on the sale of a business

The business sale might expose the seller and their family to unwanted scrutiny, especially when the business in question has a national profile or where the business exit is structured as an IPO. The sale can affect an individual’s reputation; for example, if there are concerns about employees’ prospects or a listing does not perform as expected.

If the individual sells a stake in the business, and not all their interests, they may lose control over the business. Not only may they disagree with the buyer’s business strategy, they may be tainted with any negative publicity arising from the buyer’s actions despite having limited or no involvement in the business’ management.

A sale puts a value on an individual’s or family’s wealth and this can lead to pressure from family and friends for financial support. This can trigger family disputes and providing regular financial support can store up issues that come to a head once the seller has died.

The seller will have been highly successful in their chosen business but may not have much experience in investing in the public and private markets. To preserve the capital for the long-term benefit of their family, they will need to invest the sale proceeds to protect against the erosive effect of inflation.

Consideration will also need to be given to protecting the sale proceeds from the risk of divorce or separation (of both the seller and their descendants).

Preparation is key to building an enduring legacy

Putting the time and effort into preparing for a business sale and how a seller is going to manage their wealth will help them to build a lasting legacy.

Ideally, the seller should consider the interaction between their estate plan and a business exit well in advance of any sale. This will enable them to capture the available tax reliefs and create a suitable vehicle for passing on wealth to the next generation. For example, a seller of shares in a private trading company could consider transferring those shares into a trust before the sale to secure relief from inheritance tax and establish a flexible structure for holding the family’s wealth.

Alternatively, a seller could explore the formation of a ‘family investment company’ to hold the family’s wealth following a sale. By creating different share classes and being a director of the company, this would allow them to pass on wealth whilst retaining control over the timing of when their children receive income and capital.

The sale proceeds could be protected from divorce or separation by negotiating or updating pre or post-nuptial agreements. Creating or updating a seller’s estate plan is also essential, and with care family disputes can be managed by encouraging open communication between family members.

In short, getting the right advice will enable individuals and families to make the most of the opportunities available after a business sale.

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