Wills, Trusts & Estates News

Retirement and business succession in the "credit crunch" - Jon Bloor & Jessie Hughes

For many small business owners the business or company they have built up over many years is their main source of income as well as their most valuable asset.

In many cases the only way to realise this "asset" in order to provide an income for retirement will be a sale of the business or company (or in the case of family companies a transfer of the business to the next generation).

One particular worry for those in this situation who are approaching retirement age is whether the current economic difficulties (or "credit crunch") will make it more difficult for them to achieve this.

Lees have acted for a number of clients going through this process in the last six months and the good news is that there is still an active market for the sale of small to medium enterprises and family businesses of this kind.

Whilst it can be more difficult for a buyer to obtain bank funding at the moment, our experience is that banks are still open for business and that support is available for the right propositions. This means a fundamentally sound business with a clear business plan, quality asset base over which a funder can take security and, critically, tight control of their finances and cash. Another feature of the current market is that strong businesses such as this are beginning to see the value in opportunities to grow their own business by the acquisition of competitors.

Another development is a creative approach to financing transactions where the usual sources of funding are not sufficient to fund the full purchase price. For example, a number of recent transactions have featured "vendor financing" where the sellers agree to accept part of the purchase price on a deferred basis over a period of one or two years post-completion rather than on completion of the sale. With any arrangement like this professional advice is essential to ensure you have security that the deferred part of the price will be paid in due course.

If you are considering a sale in the short to medium term there are a number of steps which you can take to maximise your chances of success. Firstly, it is important to address any issues which might make your business less attractive to a potential purchaser. Secondly, accept that you may need to think creatively in order to achieve a sale - as a buyer, are there are any other sources of funding which you could access (business angels, local investment funds, friends and family etc.)? Finally, it is important to ensure that you obtain appropriate professional advice. This isn't limited to legal advice once a sale is agreed; accountants or corporate finance advisers may be able to advise on potential purchasers for your business and ways to structure the sale to maximise the value you receive and ensure that the sale is dealt with in a tax efficient manner.

At this stage, it is also incredibly important to review your assets and the value of your estate. If you haven't already done so, you will need to consider making or reviewing an existing will, reviewing your position for Inheritance tax, exploring the option of transferring assets and creating Lasting Powers of Attorney.

It's alarming that over half of the UK population die without making a will (or ‘intestate'). Many people assume that if they die intestate their estate will automatically pass to their spouse or civil partner. This is not necessarily the case. The law currently states that if you are married with children only the first £125,000 in your estate will automatically pass to your spouse or civil partner. Anything over this, will be subject to a rather complicated division and trust arrangement. While this amount is due to be increased to £250,000 on the 1st February 2009 the Intestacy laws nevertheless can create uncertainty and confusion at the worst possible time for grieving relatives. Furthermore, in the absence of any civil partnership, the Intestacy laws do not provide at all for a cohabitee, irrespective of the time you may have been together.

The simple process of making a will ensures that your estate goes to the people you want to benefit and in the appropriate proportions. By making a will through a solicitor you will be able to gain comfort in the knowledge that all the options available to you have been fully considered. Certainly at Lees Solicitors, we see a variety of circumstances from clients wishing to ensure they protect their ‘soon to be divorced' child from inheriting outright and then having that inheritance applied as an asset in the divorce proceedings, to clients worrying about the possibility of having their hard earned assets being used up to fund care costs in later life.

While making a will, you may also wish to consider making a Lasting Power of Attorney (‘LPA'). There are two types of LPAs. The first, a Property and Affairs LPA allows a person or people of your choice (called attorneys) to assist you in dealing with your finances and in the event that you become mentally incapable of dealing with your affairs, those attorneys will be able to make decisions for you.

The second type of LPA is a Personal Welfare LPA and can only be used once you have lost mental capacity to make your own decisions. The Personal Welfare LPA allows the attorney or attorneys to deal with welfare decisions, for example, your day to day care, refusing or consenting to medical treatment and possible end of life decisions.
This stage in your life should be an exciting one. Dealing with the issues raised in this article should help you to enjoy the retirement you've worked so hard for and give you peace of mind.

For further advice in relation to making a will or a Lasting Power of Attorney please contact Jessie Hughes in the Wills, Trusts and Estates department or if you would like to discuss any aspect of the sale or purchase of a business please contact Jon Bloor in the Business and Property Services department on 0151 647 9381.

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