Family matters: Can I sell my family business to the next generation rather than gifting it?

Whether you are the first generation, or the business has been in the family for generations, at some stage you will be thinking about your future retirement and how to transition the business. 

Firstly, you should consider whether the next generation ‘taking the reign’ is the best option for the future of the business (and best for the future of the wider family wealth).  We have a separate article called ‘When is the right time to sell my family business?’ that covers the main considerations to ensure you are making the right move. 

Once deciding that passing to the next generation is the best option, you may be of the mindset that as a family business, there is an inherent expectation to transfer shares down to the next generation and sacrifice any value from selling your shareholding. 

Can you sell a family business to the next generation? The simple answer is, yes. 

But is selling to them the right thing to do?   

Well, ultimately selling to the next generation gives you the chance to extract equity value from the shareholding you have held (and the hard work you have put into the business through ownership, including navigating risks, taking on responsibilities and building value growth). 

By selling to the next generation, they will also need to work hard in the business to repay the value owed to you and as they do so, they will build their own equity value. 

The main differences between transferring shares onto the next generation or them inheriting on death ‘vs’ selling to them can be broadly covered by three main factors: 

  1. Extraction of value;  
  2. Inheritance tax; and 
  3. Business ‘debt’. 

If you transfer your shares or they pass over to the next family generation on death: 

  1. Although you may have continued to receive salary, pension payments and dividends during your ownership, you will not benefit from an extraction of equity value in the form of a significant capital gain in your lifetime.  Likewise, if the shares are transferred, you would not receive a capital event in your lifetime   
  2. Under current tax legislation, holding shares on death is sheltered from Inheritance Tax, therefore the next generation will gain the shareholding without being exposed to certain tax implications 
  3. As the shares would pass for free, then there wouldn’t be the requirement for an additional debt raise, or liability owed to the current generation from the balance sheet of the business 

Note: you would need to plan the tax implications if transferring shares to children prior to death.  Potentially this is able to be completed via reliefs at nil tax under current legislation. This would require an application to HMRC to claim potential relief’s so professional advice would be needed on this.  

If you were to sell your shares to the next generation: 

  1. You would benefit from an extraction of equity value in your lifetime at capital gains tax rates rather than income tax rates on salary/dividends to enable you spend in retirement or invest as appropriate 
  2. Cash extracted, could be subject to inheritance taxes as part of the estate on death (unless the cash is spent or gifted to family members at least 7 years before passing) 
  3. The sale would typically be structured so that a mix of consideration is paid and deferred to the current generation.  This ‘debt’ (either to a third party or to family), will typically be raised against the business, and therefore the next generation will need to continue to work hard to repay amounts owed to increase the value of the business. 

In summary, if you sell your shares to the next generation, both the current and the next generation could benefit from equity value extraction at Capital Gains tax rates (i.e. two ‘bites of the cherry’).   

The main risks for this, however, are that there may be increased inheritance tax exposure, and additional debt in the post transaction business that will require continued profitability to repay to enable the next generation to rebuild the equity value of the business.  Inheritance Tax planning advice can look to mitigate exposure to IHT as appropriate. 

If I do want to sell to the next generation, what is the business worth and how do the next generation afford it?  

A businesses value is an amount agreed between a willing buyer and seller. There are many methods for valuing businesses, but a common method is to assess market-based comparatives to your business.   

We would advise getting in touch with professionals like CN Strategic Advisors early to discuss a potential transaction in more detail and how the deal value and structure could look for you. 

The funding for a transaction such as this will be a combination of excess cash in the business, next generation / new management injection, external debt funding, deferred consideration and equity roll.  

There are also many iterations of selling or extracting value from a family business, and our advisors are here to help provide visibility of options that meet key family objectives for succession, wealth and legacy.  

CN Strategic Advisors are a family-owned independent advisory boutique, providing specialist advice to business owners on key business decisions and milestones such as; Strategy, Succession, Business sales, Acquisitions and Raising finance.