Family Business Buyouts (FamBOs)

Much family successions involves the gifting of shares in the family business to the younger generation. Whilst this may have been the most common way of the family organising its affairs, in recent times we have seen the increase in interest in FamBos as a way for the business to pass down the generations.

What is a FamBO?

A FAMBO or Family Management Buyout (or sometimes called a Succession Buyout) is a type of business acquisition that involves the younger generation acquiring the business rather than being gifted the business. It is a popular option in situations where the current owner is looking to retire or exit the business and wants to realise some of the value associated with the business, whilst keeping it in the family.

What are the main considerations with FamBOs?

Family businesses must continually balance treasured personal relationships with commercial realities. It is especially important at the point when one generation or individual has decided the time is right to exit. So is a FamBO right for your business and what other ways are there to structure the handing over of the reins to the next generation?

FamBOs keep the business in the family and therefore allow the family’s values and culture to remain associated with the business. Going down the FamBO route does require the next generation to find funding for the purchase. These pillars may be seen as a positive or a negative so it would be vital to consider what would be appropriate for each specific circumstance.

What are the tax issues of passing a family business to the next generation?

Tax on disposal of shares in a family business

A primary tax concern for the vendor will be the impact of Capital Gains Tax on the sale. However, UK entrepreneurs and family business owners selling or giving away their business can obtain Business Asset Disposal Relief which is an allowance of £1,000,000. Unsurprisingly there are some strict criteria for qualification for BADR so it is important to structure the sale appropriately.

Structuring for a sale could start years before the FamBo. Possibly with a demerger to extract assets which the younger generation will not be acquiring out of the business.

Gift Hold Over Relief

Whilst the older generation may choose to sell the company shares, they do not necessarily need to sell them for full market price. If the sale is at a discount then there is an element of a gift by the older generation. Despite this the older generation will be taxed on the full value of the business. This is where gift relief hold over may be useful, but it only applies if the company is an unquoted trading company. It enables the older generation to 'hold-over' the capital gain. In essence this means the capital gain is deferred until the beneficiary sells the shares in the future. Again, attention is needed regarding qualifying businesses as the company’s main activity must be trading. A demerger prior to a sale may be useful to allow hold over relief to be available.

Inheritance Tax

If the older generation have successfully minimised the CGT liability, there is still the potential for IHT concerns as the older generation will be receiving cash in exchange for their holding in the family business. It may be worth looking at a trust structures to minimise the risks of IHT.

Are FamBOs more tax efficient than transferring shares in a family business?

There is no “yes” or “no” answer to this question as it depends on the financial needs of the older generation and the activities of the business. The twin advantages of a FamBo are that the older generation are provided with funds to finance their continued lifestyle and the younger generation may be motivated by the need to repay their own financing to buy the business.

Tips to make sure your FamBO is a success

Long term plan

As with every significant change, the families who manage them most successfully are the ones who have followed a plan to make the transition a smooth one. That usually includes some long term planning in advance to ensure that everyone is aware of the plan, everything is transparent and any assets that the younger generation do not want are sold by the business or retained by the older generation.

Professional valuation

The biggest area for potential dispute is in the valuation. Sophisticated companies may have a shareholder agreement that outlines the methodology that should be used. If that is not in place, an independent valuation is important to determine a market value. It is then a family decision about the extent the business is sold at a lower price.

Don’t negotiate directly

Allow trusted advisers and who will act in the interest of the family to conduct the detailed aspects of the sale in order to keep the family removed from the potential emotion of the discussions.

Tax and estate planning

It’s really important to consider the impact on the whole family, up and down the generations so that all feel they’ve been considered fairly. As ever, this is best done sooner than later.

How we can help

We can advise on the most appropriate business structure for your business but for the families we work with we’re much more than just a trusted business and financial adviser. We’re counsellors, mentors, an impartial sounding board and an empathetic ear. We’re a source of even-handed advice when you’re facing the difficult decisions about the best way to organise a transition to a new generation.