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Law for Business

Knowhow - guidance - precedents

Veale Wasborough Vizards , 11 MAY 2015

Sharing the growth of the family business and locking in shareholder value

Sharing the growth of the family business and locking in shareholder value
From 'Family Business Matters', Spring 2015
By
 Nicholas Smith, Partner Veale Wasbrough Vizards

All family businesses should give careful consideration to succession planning, which may include:

  • incentivising the next generation of managers to grow the business and benefit from it as shareholders, and
  • planning for retirement by locking in shareholder value
This could be achieved by introducing 'growth shares' and 'freezer shares' into the business. The rights attached to these shares can be tailored to meet the needs and circumstances of each family and their business, and can be used alongside other inheritance tax planning tools.

Growth shares

Growth shares enable their holders to participate in capital growth and/or dividends when an agreed financial threshold(s) is exceeded. They can be particularly useful for incentivising new managers. Growth shares could entitle a manager to:

  • receive a dividend where the annual profit of the business exceeds a specified threshold or formulaic amount, and/or
  • receive a share of the sale proceeds if the business is sold for more than a specified amount. This entitlement could be tiered so that the manager's share increases in line with the eventual sale price
Freezer shares

Freezer shares are used to lock in existing value and can give greater certainty to:

  • an older generation, as they will receive or will be able to pass on the value that they have built up in the business, or
  • the next generation regarding the price to buy out the older generation
This could be achieved by issuing a new class of ordinary shares to the younger generation and altering the rights attached to the existing ordinary shares held by the senior generation to provide (for example):

  • a right for the company to buy back shares from the senior generation at a fixed price per share, based on the current value of the business or a price derived from a formula
  • a right to receive a preferential dividend ahead of other dividend payments. These payments could be deducted from the buyback price to make it easier for the next generation to finance the buyout from the older generation
In order to ensure these shares are introduced for the right reasons and in the most tax efficient manner, they should be considered as part of a family business' wider corporate and personal tax planning arrangement. It may also provide a useful opportunity to create or update the family's governance documents.

For more information, please contact Richard Hiscoke on 0117 314 5345 or at rhiscoke@vwv.co.uk
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