Pre-exit planning for Business Owners. 26 May 2015

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Katrina Mitchell
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1 Pre-exit planning for Business Owners 26 May 2015

2 Contents Introduction 2 Exit options 3 Supporting your business through the growth cycle 4 Protecting your business from personal circumstances 5 Incentivising the management team 6 Pre-exit tax planning 7 Business structuring at time of exit 8 Personal succession planning 9 Experience 10 Charles Russell Speechlys at a glance 11 Speaker profiles 12 Pre-exit planning for Business Owners 01

3 Introduction They do an absolutely marvellous job. The work is unique and they really excel. Chambers UK, 2014 It is never too early to ensure that businesses are ready for succession whether you are preparing for a sale or planning for the next generation. We are often asked by business owners how they can achieve the seamless handover of the business both in the context of company sales and in personal estate planning. As one of your most valuable assets, it is essential to get this right. Charles Russell Speechlys is one of only a handful of major international law firms which combine a leading private wealth practice with a significant business law capacity - offering a 'joined-up' service for wealthy individuals, entrepreneurs, family offices, wealth managers and large, privately held businesses. As a result of our long experience in this area, we understand business owners unique requirements and the issues that drive family businesses. Unlike others, we are relationship rather than transaction driven. We work hard to build strong, long-lasting relationships with our clients, so that we can support them through inevitable periods of transition, for example when the interests of founding shareholders differ, when management and ownership is passed down one or more generations or even outside the family, or when additional investors are introduced. During such times we are particularly adept in advising on the ownership, tax, governance and succession issues, recognising the often complex interaction between business, family and personal interests. We understand the importance of pre-empting many of these potential challenges and how to make the most of the opportunities they offer, as well as addressing the occasional pitfalls and tensions that can arise. With successful businesses, no two scenarios will be the same. Our dedicated and specialist business owners group consists of lawyers from across our corporate, commercial and private client legal teams, allowing us to adopt a genuinely integrated approach when advising clients to provide solutions that are commercial, client-focussed and, most importantly, secure the interests of all of the different stakeholders in the business. Pre-exit planning for Business Owners 02

4 Exit options [The team s] deal experience was invaluable. They demonstrated a real ability to think through and deliver practical solutions in a number of challenging areas; and brought a drive and focus that really stood out. We thoroughly enjoyed working with them Edward Brett, Partner, Elysian Capital LLP When thinking about your exit, there are several things you may want. These could include: the optimal price minimising contingent liabilities a tax efficient deal a clean break a relationship in the future. If you have not been through the process of a business sale before, it is important that you consider the different types of buyers available on the market: Private Equity/Venture Capital Trade Sale Angel or Super Angel networks and individuals Management Buy-Out (MBO), Management Buy-In (MBI) or a combination of the two (BIMBO) Stock market: float/ipo Family offices/multi-family offices We are able to advice on all of the above routes. Our advice is always provided in the context of maximising your personal wealth as part of the exit strategy. Pre-exit planning for Business Owners 03

5 Supporting your business through the growth cycle We support businesses through the corporate life cycle and protect your personal assets Venture rounds Bolt-ons Bank / Venture Debt / Alternative Finance Equity CM / MBO/ Trade Sale Angels Grants / F&F Concept Start-up Growth Later-Stage / Maturing Exit Corporate, Commercial, Employment and Employee Benefits, Real Estate, Compliance, Intellectual Property, Tax, Pensions, Litigation legal audits along the journey

6 Protecting your business from personal circumstances The effort they put into anticipating problems rather than waiting for them is impressive. Chambers UK, 2014 The business may well be one of your most valuable assets: therefore ensuring it is protected against death, disputes and divorce is vital. Business protection trusts, essentially Business Wills, provide a level of certainty to business owners. The concept of a business protection trust is very simple: they are not driven by tax-planning but instead their primary objective is to ensure that there are sensible plans in place should you or a co-owner become ill, suffer a life-altering injury, pass away prematurely or decide to leave the business. Through a combination of life assurance, trust documentation and cross options, you can ensure that the right amount of money gets into the right hands at the right time, to secure the future of the business and the financial needs of your family. A Lasting Power of Attorney should also sit alongside your business protection trust, to set out what would happen to your interest in the business if you, or your business partner, lose mental capacity. Proper planning is essential to avoid future disputes arising from disgruntled family members or business partners. Too often these considerations are overlooked, with potentially disastrous results for the family and the business. It is also worth considering asset protection through Pre- and Post-Nuptial or Cohabitation Agreements, as financial claims by former spouses or partners of family members can put under threat assets built up over time, and their intended benefit for future generations.

7 Incentivising the management team The team is impressive. They respond quickly to issues and come up with pragmatic advice. Chambers UK, 2015 Strong and stable management ultimately drives business value. To ensure long-term commercial success, it is vital for businesses to recruit, retain and incentivise a strong management team. Depending on which exit route you decide to take, the management team can also be considered as a huge asset. It is therefore worth considering which schemes will strike the balance between an enticing deal for the management team and a scheme which the buyer will be willing/able to manage in the future. Choosing the right scheme could also result in greater returns to you and your founder shareholders. Lower tax rates payable by the management team mean you can offer less of the equity to management and retain a greater share yourself. In addition schemes may result in valuable tax reliefs being available to the company, meaning the company s asset value increases, potentially allowing you to adjust the purchase price on a sale accordingly. The types of incentive schemes you might use may include the following: Enterprise Management Incentives (EMI) Aimed at smaller companies with gross assets of not more than 30million and group employees of less than 250. If structured correctly all gains are treated as capital, not income. Entrepreneur s Relief (ER) is available to reduce CGT charge to 10%. Tax-advantaged schemes For those who do not qualify for EMI, the following may be considered: Company Share Option Plan ( CSOP ) Nil paid shares Growth shares Joint share ownership schemes All proceed with the aim of securing capital gains tax treatment, though care should be taken with implementation to minimise risk of HMRC enquiry. Unapproved schemes Gains will be treated as income for tax purposes Not tax efficient, but simple to implement Employee shareholder status Sacrificing employment rights in exchange for no tax arising on sale Initially met with scepticism but increasing in popularity Pre-exit planning for Business Owners 06

8 Pre-exit tax planning They're always available, approachable and amenable. The quality is a given. Chambers UK, 2015 With advance preparation you can avoid pitfalls, maximise available tax reliefs and preserve wealth for future generations before the sale of the business. Putting plans in place early can also enable a sale to be organised at short notice should an appropriate buyer make an approach, or if it is necessary to sell the business to deal with the consequences of an unexpected death or incapacity of an owner. Entrepreneurs relief: reducing your capital gains tax liability to 10% Capital Gains Tax (CGT) is normally charged on the gain in value of your assets (including an interest in a business) on any gift or sale, at a maximum rate of 28%. However, where you dispose of a business (including a partnership or shares in a trading company), Entrepreneurs Relief (ER) could reduce your CGT liability to 10% - a welcome 64% tax saving. There is no limit to how many times you can claim ER, but the relief currently has a lifetime cap of 10 million. To claim ER, the business must either be a trading company or the holding company of a trading group (or a similar sole trader or partnership). Additionally, the owner(s) must, for the whole of the twelve months leading up to the sale: hold at least 5% of the ordinary shares in the business (or be a partner); hold at least 5% of the voting rights; and be an officer or employee. If your gain is over the ER limit of 10 million, some of the gain will be taxed at 10% but the excess will be taxed at up to 28%. By carefully restructuring the ownership of the business, perhaps between spouses or other family members, it is often possible to maximise the CGT saving to ensure that as much as possible of the gain is taxed at the lower rate of 10%. It is possible for trustees of family trusts to claim ER if additional requirements (such as one or more beneficiaries qualifying for ER in their own right) are met. The tax savings arising from a well-planned business exit can be dramatic and business owners are well advised to take specialist tax advice on how to structure their business as early as possible. Pre-exit planning for Business Owners 07

9 Business structuring at time of exit [The team] provides robust advice and a pragmatic approach to problem solving. Legal 500, 2012 In addition to supporting you on personal aspects pre-exit, our 70 strong Corporate group are able to assist on all aspects of corporate and commercial advice at the time of exit. Our strength in understanding growth and venture companies' fundraising and investment from all perspectives is borne from the variety of our experience in acting for: funds being established and raising investment monies founders of seed funded and early stage companies business angel, venture capital, venture debt and private equity investors university spin-outs management teams and companies seeking funding investee companies on portfolio transactions investors and founders/managers on exit transactions, whether trade sales or IPOs. Our lawyers give pragmatic advice and go that extra mile to help get the deal done. We offer hands-on support to help a growing business through a major, once in a lifetime deal, to advising management teams on private equity transactions, management buy-outs and buy-ins, as well as a broad range of equity and debt capital markets transactions, group re-organisations, public takeovers and corporate governance. Our multi-disciplinary approach means we can offer a menu of legal audit service components, including Commercial, Compliance, Intellectual Property and Employment. Having a healthy business improves value, so we are committed to ensuring the nuts and bolts of your business are sound to attract genuine investment opportunities; all looked at through the lens of your company s risk profile/appetite and commercial objectives. Our sector approach is particularly important when undertaking due diligence, verification and negotiating warranties in transaction documents. To view our latest Capital Markets deals, please click here. Pre-exit planning for Business Owners 08

10 Personal succession planning The team is very sophisticated in the tax area and it has the ability to handle high-level planning matters in cross-border contexts. Chambers UK, 2014 Protecting your business is one thing, but it is also important to apply the same principles to your ongoing personal affairs to ensure that your assets suffer the least possible tax during your lifetime, on your death and in your heirs estates. Inheritance tax (IHT) could cause 40% of your sale proceeds to pass to HMRC rather than your heirs. Furthermore, any funds that pass to your heirs might be threatened by their future divorce, bankruptcy or financial vulnerability. These threats can all be minimised by making gifts into family trusts during your lifetime and/or on your death. It is important to consider whether you might wish to pass all or part of your business wealth (but not necessarily control) to your family well in advance of any sale as it can often be more tax efficient to give away shares before the sale rather than cash afterwards. You should also have a Will in place that deals effectively with any business assets owned at your death. Your Will should be sufficiently flexible and structurally capable of maximising the available tax reliefs such as Business Property Relief (BPR), which can reduce IHT from 40% to nil on your business interests. It should also take into account any business protection trust that you establish during your lifetime. A carefully drafted Will can save IHT, not just on the death of the business owner but also on the death of his/her spouse, ensuring that more of the wealth that the business owner has worked hard to create can pass to his/her chosen beneficiaries. Pre-exit planning for Business Owners 09

11 Experience UK entrepreneur UK hotel business Latin American family Major UK family Family founded listed company UK retail business International fashion family business Advised the shareholders of a technology business on a capital reorganisation to effect capital gains tax and inheritance tax savings and on the 40m sale of the business, achieving significant tax savings and wealth protection. Advised an individual owner on the possibility of selling his hotel business, in particular advising on terms, reviewing documentation and developing a plan for effecting the proposed sale tax effectively, whilst maximising the benefit to his wider family and protecting the individual from liabilities. Advised on and implemented a major trust and corporate group reorganisation for a multi-billion dollar industrialist family throughout the Americas. The reorganisation was prompted by a need to accommodate changes in US tax and reporting rules for the benefit of US family members and a need to establish family governance procedures to allow for orderly ownership exits by family members of this family now in its third and fourth generation of ownership. Advised several generations of a family which owns around 2bn of mixed-use property. For the company, we have advised on equity and debt restructurings, property and construction matters, contractual disputes as well as employment issues and management incentivisation. The company is owned by around 20 family members and their trusts, for whom we provide wealth protection and succession planning advice. This integrated commercial and personal advice has helped preserve the family's wealth for more than 150 years. Long term adviser to family founded listed mining company which started life on AIM then listed in Toronto and on the Main Market of London Stock Exchange. Advised a family of significant wealth on inheritance tax planning. We also reviewed the corporate governance documentation surrounding their family business assets, advised them on succession planning for the business (including changes to shareholders agreement and memorandum and articles of association) and reviewed the various lending arrangements for the business. Advised an international family business retailer of luxury children s fashion on a number of contentious issues, including the exit of a very senior member of management and the resignation of another employee, avoiding a tribunal claim. Trade sale of family business Exit from investment Advised L.A.B. International Limited ("LAB") on the sale of 90% of Pfunda Tea Company Limited to Borelli Tea Holdings Limited, a wholly-owned subsidiary of one of the world s largest tea producers listed on the Mumbai stock exchange. LAB is a family owned tea business representing the current incarnation of a family connection with tea that stretches back over 140 years. Advised the owner-manager of an international food manufacturer and retailer with branches in Europe, the Middle East and the Far East on the sale of a 20% interest to a Saudi investor, together with the related shareholder arrangements. The investor used an offshore holding vehicle to make the acquisition. Pre-exit planning for Business Owners 10

12 Charles Russell Speechlys at a glance Practical advice focussed on achieving client objectives in a cost effective and low risk way. Legal 500 UK, 2014 Charles Russell Speechlys is a law firm headquartered in London with offices in the UK, Europe and the Middle East. Formed in 2014 by the merger of Charles Russell and Speechly Bircham, our aim is to be the leading English law firm combining specialist business law and private wealth advice internationally. We provide transactional, regulatory, advisory and litigation & dispute resolution services to major corporates and privately owned businesses. We have significant strength in Real Estate & Construction, transactional expertise across Financial Services and specialist litigation and dispute resolution, employment, intellectual property and commercial teams advising in Healthcare, Retail & Leisure, Sport and TMT. At the heart of the new firm is our commitment to Private Wealth. The merger reinforces our ability to provide a seamless service for wealthy individuals, family offices, private banks, trustees and wealth managers and large, privately held businesses, combining advisory skills, developed in the world of Private Wealth, with our business law expertise. Whatever the specialism, all our lawyers are focussed on delivering solutions and personal guidance supported by legal insight and commercial judgment. Pre-exit planning for Business Owners 11

Speaker profiles Henry Fea Partner, Private Client T: +44 (0)1242 505293 henry.fea@crsblaw.

13 Speaker profiles Henry Fea Partner, Private Client T: +44 (0) Henry is a private client lawyer with a broad range of experience, gained from working in both the UK and Geneva (where he was head of the office from 2009 to 2014). His domestic work includes advising on tax and succession planning, the establishment and operation of trusts and charities, landed estates, heritage property, UK Wills, probate and the administration of estates. Internationally he advises on tax and trust matters and he has particular expertise in advising on becoming, and ceasing to be, UK resident, the establishment and operation of offshore trusts and ownership structures for UK property. He has extensive experience of advising on regularising tax affairs in the UK and abroad, particularly through the Liechtenstein Disclosure Facility and the UK/Swiss Agreement. His clients include UK domiciled and non-uk domiciled individuals, families, trustees, foundations, foreign lawyers, banks, private companies and trust companies, and he regularly works alongside other professionals. Whilst in Geneva Henry was actively involved in the Committee of the Geneva branch of the Society of Trust and Estate Practitioners and he is a regular commentator on legal developments affecting private clients. Pre-exit planning for Business Owners 12

Clive Hopewell Partner, Corporate T: +44 (0)20 7203 5203 clive.hopewell@crsblaw.

all of whom are active in the ENR sector. Clive headed the Firm's Middle East practice for nearly 5 years, building a significant presence in Bahrain and, more recently, opening an office in Doha.

14 Clive Hopewell Partner, Corporate T: +44 (0) Clive is a specialist in corporate finance work and is also head of the firm's Energy & Natural Resources Group which brings together lawyers from across the firm from a variety of disciplines of all of whom are active in the ENR sector. Clive headed the Firm's Middle East practice for nearly 5 years, building a significant presence in Bahrain and, more recently, opening an office in Doha. Clive specialises in international fundraisings and mergers and acquisitions, both public and private. Clive spent a period of two years as an adviser in the Equity Markets Group of the London Stock Exchange (now known as the UK Listing Authority) and his securities practice involves acting for both institutions and issuers in respect of listings in London and elsewhere. He has particular experience in advising on dual listings between London and Toronto. Clive's practice is particularly international. On the private equity side, he regularly advises on investments in a variety of jurisdictions and he has a particular expertise in the Gulf States and emerging markets. On the securities side, he has wide experience of advising on domestic and international listings and offerings. Clive is also included as a Corporate law specialist in this year s Spears Guide where he is noted as advising international business ventures - particularly those planning to acquire, merge, list or raise funds on capital markets. James Austen Senior Associate, Private Client T: +44 (0) james.austen@crsblaw.com James advises high net worth UK and international clients and trustees on a broad range of tax, trust and estate planning matters and his work often involves co-ordinating tax advice across a number of jurisdictions. He has particular experience in advising business owners. He often deals with contentious and semi-contentious situations, including tax enquiries. James was one of Private Client Practitioner s 2013 Top 35 under 35 ; he was a finalist in STEP s 2014 Young Practitioner of the Year award and he is ranked in the 2014/15 Who s Who Legal. He is a member of STEP. Pre-exit planning for Business Owners 13

Martin Griffiths Senior Associate, Corporate Tax T: +44 (0)20 7203 8886 martin.griffiths@crsblaw.

15 Martin Griffiths Senior Associate, Corporate Tax T: +44 (0) Martin advises on all aspects of corporate tax law with areas of expertise including domestic and international tax structuring, tax on corporate and property transactions, investment fund tax issues, private equity structuring, stamp duties and value added tax. He has substantial experience in providing advice on structuring investments into UK property. Martin also advises on planning and structuring of employee share incentive schemes, employment related tax issues, including remuneration strategy and also enjoys advising on venture capital schemes and commercial tax matters. He designs employee equity incentive arrangements for both small start up companies and multinational public companies and anything in between. Martin is a regular speaker on investing in UK land, employee share schemes and charity tax law. Pre-exit planning for Business Owners 14

Whether we are hands-on supporting a growing business through a major, once in a lifetime deal, advising investors or management teams on private

Corporate Whether we are hands-on supporting a growing business through a major, once in a lifetime deal, advising investors or management teams on private equity transactions, management buy-outs and