Transferring a family business

The problem

I've been working in the family hotel business for a number of years. The business is operated through a company owned by my parents. After some gentle persuasion, my parents are thinking of retiring and have mentioned transferring the company to my wife and me. What do I need to consider?

The law

This raises a potentially wide range of legal issues, including tax planning and operational and ownership issues.

Expert advice

You're fortunate to be given this opportunity, but there are a number of issues you, your wife and your parents need to consider before rushing into anything. First and foremost, you need to agree the most suitable - ie, tax-efficient - structure for all concerned. Avoiding inheritance tax will no doubt be the key incentive for your parents, but you and your wife should also think about this and consider whether it would be appropriate to set up any family trusts which could help to transfer wealth down to the next generation in due course.

Once the structure is agreed, you will need to investigate more fully exactly what's being offered to you. You may feel you already know the business inside out, but you'll need to carry out a proper due diligence process before taking over, as with effect from completion all assets and liabilities of the company will pass to you.

You and your wife will then need to deal with the mechanics of acquiring the company. This will usually involve a short share-purchase agreement and various ancillary documents, but in preparing these you will need to look carefully at the company's constitutional documents (primarily the articles, which set out the rights attaching to the shares) and also any shareholder agreement which might be in place between your parents.

On the operational side, you and your parents will need to review all key contracts with suppliers and other providers to the hotel and make sure there are no provisions which would trigger the termination of these on a sale of shares. It may well be that there are relatively few written contracts in place, in which case you may want to revisit this in due course to check you have the best deals available and tidy up any loose ends.

You should also use this opportunity to review the structure of the business following completion to ensure it's best suited to you and your wife. Changing what can often be an archaic structure is not a sign of treachery or mistrust in your parents it's simply a chance to address issues that are relevant to you and your wife.

You may want to consider, for example, incentivising key employees by giving them shares in the company (the rights to which can differ from your "family" shareholding to ensure you retain control). Or you may wish to tighten the transfer provisions so that shares cannot be transferred outside the family. This is particularly helpful in the (hopefully) remote scenario of a divorce in the family.

Check list

Both you and your parents should be speaking at an early stage to a lawyer with experience of this type of transaction. While it doesn't have to be complex, it's worth spending time with the experts at this stage rather than regretting a costly decision later.

Beware!

Retirement can be an emotional issue at any time, but when it also means transferring a family business to the next generation, it can be exceedingly sensitive.

If not handled sensitively, any signs to move things forward or institute change could be viewed as ungratefulness on your part.

Contacts

• Victoria Symons, Associate, Boodle Hatfield, 020 7079 8119 vsymons@boodlehatfield.com