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Succession planning & share value | Value Added - True Stories
Chartered Accountant & Business Consultant - Meredith Harington

Succession planning & share value

Succession planning is one of the greatest challenges facing the owners of closely held companies. Without a proper succession plan the business will die when the owner retires, he/she will therefore not be able to unlock the capital value of the business and staff may no longer have a job. Over the years, we have created any number of innovative structures, each unique to the particular situation, that allows for:

  • The identification of potential successors
  • A method of structuring the financing of the transfer of the business/shareholding in a way that is
  • Affordable to the acquirer of the business or the shares
  • Protects the interests of the seller and allows for the realisation of capital
  • Does not impact of the company to carry on business as before
  • Tax efficient to all parties
  • Complies with all relevant legislation

The process requires a delicate balancing act that ensures the interests of buyer, seller and the business are looked after.

On one such occasion, a client sought to "transfer" an interest in his company to a staff member in an attempt to retain that person in the company, as part of his succession plan. The aims were to avoid taxes, as far as was legally possible, to both the transferor and the acquirer of the shares. At the same time, the idea was for the acquiring party to pay as little as possible for the shares acquired. The seller also wanted to be able to realise, for himself, the value of the company at that date. To simply donate the shares in the company to the new shareholder would create a donations tax problem to the seller, given the high level of retained reserves in the company. It would also have been seen to be a fringe benefit to that staff member. At the same time, the seller wished to retain the value pertaining to those reserves to himself, as they represented value he had grown from his own efforts and for the risk he had taken in first starting up the business. To simply declare those reserves to him at that stage would have led to a large Secondary Tax on Companies (STC) charge. The solution that we came up with was to create a new class of shares. These shares shared in all the same voting and other rights as the existing shares, other than it had no rights to the reserves at the effective date of ?the deal. The new shares were then issued at par value in the ratios necessary to achieve the desired new shareholding. As a result, all objectives were achieved in that:

  • The cost of entry was minimal to the acquiring party
  • Donations tax was avoided
  • No fringe benefits tax was payable
  • STC, which would have amounted to approximately R 900 000, was not payable

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