Case Study

The following is a typical assignment which exemplifies the lessons that can be learnt and the creative solutions that can resolve the issues. Suffice it to say that legal action was imminent – which most likely would have significantly destroyed the value of the park and resulted in it leaving the family’s control. Involvement before “the legal button was pressed” resulted in a successful outcome – albeit both “sides” were equally unhappy – often the sign of a good deal.

The background

  • It is a second-generation park making pre-remuneration profits in the region of £1.0m
  • It is owned equally by three siblings aged between 55 and 72 and was left to them by their father who was the founder
  • The value of the business – based in North Wales – is approximately £8m and comprises land from which the park operates and other commercial investment properties it lets out on a commercial basis
  • There is other land and properties not owned by the company but owned equally by the three siblings to the value of a further £4m – some of which are let to the company
  • One of the siblings has lived in London for many years and has no intention of returning to North Wales nor to become actively involved in the business although he draws very limited remuneration from the company
  • The other two siblings work full time in the business and draw the majority of the profits by way of remuneration
  • The siblings in North Wales were very averse – even if they had been able to – to borrow to reach an accommodation

The sibling in London approached us to regularise the position between the siblings and in particular to arrange an exit route.  What has been achieved?

  • Agreement on the value of the properties – with professional assistance – was the key starting point together with an assessment of the goodwill value in the business
  • Surplus properties in the business were sold to finance the transaction
  • A company reconstruction was used to extract value for the sibling in London via an initial up-front payment followed by loan notes payable on deferred terms which also deferred the CGT
  • The more usual share buy-in was not possible in the light of the fact that it would not be treated as a capital transaction in view of the ongoing tax “connection” created by the loan notes and while technically possible an acceptable alternative proved difficult to arrange
  • Pension fund monies were used to purchase commercial premises from the company at an arm’s length price
  • The transaction was arranged without the use of external debt
  • The relationship between the siblings is far better and the business set fair to move to the 3rd generation in due course. This had been unlikely as legal action for an order for sale of the properties and potentially unfair prejudice had been in the offing

What are the lessons to have learnt?

  • The siblings should not have been in this position at the outset. Their father did the natural thing of leaving the business equally to the three of them without considering the impact that this would have, given one was not and never would be in the business. He should have left the business to those working in it while using other assets to ensure fairness
  • Whilst we often act as honest broker in situations like this we only acted for the sibling in London given the severe resistance encountered to our involvement from those based in North Wales. As a result, we were able to take a robust approach on behalf of our client while protecting, to an extent, the relationship between the siblings
  • The siblings should have involved expert independent help at a far earlier stage and those in North Wales should have realised that the problem would not just “go away” as they had the majority shareholding
  • While some tax has been deferred or saved, tax considerations should not be allowed to “wag the commercial dog” as having an ongoing business with value but some tax is better than having no tax and no business
  • Each of the siblings had opposing but entirely valid expectations and views. The family connection made conflict between them far more likely
  • A shareholder’s agreement has now been put in place for the two ongoing siblings. This includes a formal dividend and remuneration policy, the creation of an internal market for shares and the agreement of a valuation criteria. Whilst this can be no guarantee to ongoing harmony there is at least now a recognition of the issues and an agreed approach for the future which should make “fall-outs” less likely
  • Differing classes of shares have been created to allow for differential dividends between the two ongoing siblings and one has taken over as MD with the majority equity shareholding while the other has “freezer” redeemable preference shares – which still defers CGT and potentially attracts Business Property Relief for Inheritance Tax
  • There is a clear recognition that there is a difference between ownership and management and that it is possible to have shares without being a director and vice versa

Every business is unique but the problems they face are not – with goodwill and a preparedness to compromise there is always a way forward.

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