While some financial commentators described the onset of the Covid pandemic in March 2020 as a so-called “Black Swan”—a one-off, rare and unpredictable event—it would appear that what we are dealing with is more of a migratory bird, a “Black Stork” if you like, whose movements recur with an element of (seasonal) regularity, at least until there is a circuit-breaker.
This recurrence, in the guise of the well-predicted second wave, has meant that entrepreneurial families whose initial reaction was to focus on operational resilience, including contingency planning, have now directed their attention to the broader, more structural issues and strategy for success of their businesses in a post-Covid world.
Business families on the cusp of a transition—whether on sale or intended transfer to the next generation—have generally experienced the greatest disruption to their pre-lockdown plans, both personally and business-wise.
Overtaken by events
Those amidst negotiations for the sale of their businesses to trade or financial buyers may have seen transaction terms change, completion timelines stall or even transactions being abandoned as part of the pandemic fallout. Former owners in recent management buy-outs may have been asked to accept temporary reductions in deferred payments due to them, to support the underlying business.
Where transactions have proceeded, business owners in the UK have had to contend with higher taxation on their gains, as the lifetime allowance for Entrepreneurs' Relief (renamed as Business Assets Disposal Relief) was reduced from £10 million ($13 million) to £1 million ($1.3 million) for qualifying disposals made on or after 11 March, 2020 or earlier where anti-forestalling rules are engaged.
This change also affects serial entrepreneurs, who have previously utilised (part of) their lifetime allowance on the sale of another business.
Helpfully, a business owner who is not an employee or director may still qualify for the £10 million lifetime allowance under the Investors’ Relief rules. There are specific carve-outs, which would allow an angel investor who became an unremunerated director or employee following the share issue to benefit from the relief where other qualifying conditions are met.
Where Entrepreneurs’ or Investors’ Relief applies, the rate of Capital Gains Tax (CGT) is reduced to 10% (rather than 20%). The UK government is, however, looking to re-assess the efficacy of these reliefs in encouraging investment into the UK.
Depending on the industry sector, business owners who have been considering an exit within the next 12 months on the basis of pre-lockdown valuations, may now feel tethered to their businesses for the next two to three years, while the economy recovers. During this time, they will need to focus on rebuilding revenue streams, innovating and addressing areas of risk, to enable them to optimise the value that is afforded to their business on a future sale.
A timeframe extending into the medium term not only delays retirement plans, if this is the objective, but also risks gains on a future sale being caught up in the maelstrom of tax changes likely to be required to replenish government resources, following what has been the largest peacetime stimulus. The UK government is looking at increased taxation on wealth and capital to go some way to fund its recovery measures in the wake of the pandemic, with recent consultations focusing on CGT, inheritance tax (with emphasis on reliefs such as Business Property Relief) and the possible introduction of a wealth tax.
Transfer to the next generation
For families contemplating transmission of the business to the next generation, the Covid period will have put pre-existing operational, organisational and governance structures to the test. Depending on the family's circumstances and industry, this may have accelerated or paused an intended transfer. Where businesses have seen value wiped off their balance sheets, the need for true crisis leadership could mean that family heads are re-discovering their entrepreneurial enthusiasm and ploughing their energies into steadying the ship, leading to delay before passing it on to the next generation. Conversely, where it is identified that the long-term sustainability of the business requires that the family innovates and diversifies, this could create an opening for an emerging next-generation leader to demonstrate their value to the business and preparedness to lead.
An environment of subdued asset values and benign tax rates should provide the ideal backdrop for business families to consider the optimal allocation of ownership and decision-making rights. Lifetime gifts of shares in the business can bank existing reliefs and rates of CGT. The resulting fragmentation of ownership can ensure that future taxation is mitigated by spreading it across multiple family members.
Economic adversity often is the catalyst for business families reassessing their priorities, whether in terms of exit planning or involving the next generation. Families who have the agility to transform, boldness of vision to innovate and foresight to empower the next generation will be best placed to weather the uncertain times which lie ahead. Getting integrated advice, which is commercial, works within but also redefines the wider family dynamics and takes account of the evolving tax and economic landscape is key to supporting entrepreneurs and their family offices in articulating and executing appropriate business succession planning, in its many guises.