Exit Planning – Step 7: Using your will to transfer shares in your company

This is the seventh newsletter in our series on planning for your exit.  In January we considered how you might exit via a trade sale and in our February issue we looked at the pros and cons of selling to your management team.

This month we consider whether you can leave the transfer of ownership of the shares in your company to your Will.

If you would like further information on selling your company or using your will to transfer shares in your company, please click here.

James Hunt and the team at
Everyman Legal

TRANSFERS OF SHARES UNDER YOUR WILL

You may decide that you will leave the shares in your  company under your Will.  Whilst this may be the right thing for you and your company this needs to be carefully thought through.

The first step is to ask yourself whether your family are really the right people to own and manage your company.  If they will simply be investors, and your company is a small one, will they be able to retain or attract and retain a competent management team to run the company?  Could it be that by leaving the company in your Will, you are simply putting off the task of selling the company yourself?

Here are some of the mistakes we have seen:

A business owner with no immediate family was planning to leave the shares in his company to two key employees.  His rationale was to reward the key employees who had worked with him to build a successful company.  The decision to leave the shares in his Will had been made after his accountant rightly told him that a lifetime gift of shares to the employees would be subject to income tax as a taxable benefit in kind.

A gift by Will has a number of considerable risks.  The greatest perhaps is the uncertainty of timing, which can be very de-motivating for the employees.  For example, the time may come when key decisions have to be taken by someone who is frail and even lack mental capacity instead of a well-informed owner.

In another case, half the shares were left by Will to the family and half to the employees, but there was no obvious leader.  The company was soon the subject of a protracted shareholders’ dispute.

The third case involves a transfer by Will of a garden centre business where the owner had transferred the freehold to a trust, which would provide an income for his widow.  The business was operated by a company, the shares in which he left to his two sons by his first marriage.  The owner had assumed his sons would run the company and pay a rent to the trust, which would ensure his widow was provided for.  However, the sons did not want to run the company.  The owner (and the solicitor who drafted the Will) had not applied their mind to this situation.  A big open question, and one that could have led to a very difficult family dispute, was how the proceeds from the sale should be split so that the freehold would be owned by the trust and the goodwill by the company.

These examples all show the danger to the business owner of consulting a Wills/Trust solicitor who might not think to question the effectiveness of the arrangements from both a company and exit planning perspective.

Hints and Tips

Before leaving shares in your company to your family ask yourself if they are the right people to take it on. If not, it might be better to sell.

Consider the risks, such as uncertain timing – family members may be too old and frail when big decisions need to be taken in the future. This can be unsettling for employees.

Take advice from a solicitor who will consider the effectiveness of the arrangements from a wider company perspective than simple Wills and Trusts.