North West accountancy firm Lamont Pridmore has raised concerns about how prepared family businesses are for succession, retirement and planning future tax liabilities, with many lacking a clear understanding of what their company is worth.

Hymans Robertson recently released survey results revealing that 68 per cent of family businesses have only an informal sense of their value.

Graham Lamont, Chief Executive at Lamont Pridmore, says this lack of clarity is unsurprising:

“It does not surprise me that so many family businesses do not know their true value, given the realities of running a family enterprise, where commercial decisions are often closely tied to personal relationships."

“Businesses need to understand what they are worth and who will run them in the longer term, yet those conversations can be difficult to start.”

A formal share valuation is often recommended, although the cost can deter some owners, particularly when the process brings wider issues to the surface.

“A valuation tends to unravel other questions that need to be addressed at the same time, especially around succession and future ownership."

“For instance, is there anyone in the family who can be the successor? Do they actually want the role and are they capable of it? Sometimes you have to assess skills and potentially choose one family member over another, which can be uncomfortable, but the best way to answer these questions is usually by openly talking about the topic with each other at as early an age as possible,” Graham says.

“Families can find those discussions hard because they involve both business and personal relationships, and nobody wants to cause a fallout. So instead, they choose to avoid having the conversations in the first place because they think this is the easier route, but this is one of the most common mistakes I see people make."

“If you do have concerns about addressing these questions with your family, a trusted adviser can help guide you through those discussions."

“A family constitution or charter can be developed which will support these conversations and help family members agree their shared values, vision for the future and the way both the business and the family relationships should be conducted to provide continuity.”

Graham explains that misunderstanding the company’s worth can have serious financial consequences, particularly where owners expect a future sale to fund retirement.

“Many business owners assume they can rely on selling the company to support their plans, although in a challenging market that may not deliver the value they expect,” he says.

“Planning at least five years ahead gives time to develop a strategy, obtain a valuation, strengthen performance and profits if needed and ensure the business is effectively marketed for sale.”

Accurate information is even more essential where most family wealth is tied up in the company rather than held personally.

“It is impossible to plan properly without clear information,” Graham says. “Owners need to know whether the business is generating enough to support those planning to retire and those continuing to work in it."

“They will also need to answer questions such as how shares will be passed to the next generation, how family and non-family members are appointed to the board and what family members who are not involved in the business can expect."

“The answers can be documented in a Shareholder Agreement to avoid confusion and future disputes.”

When planning for family succession, Graham also encourages clients to consider how to make the transfer of ownership as easy as possible.

“Can the next generation afford to fund the transition, and do they have the right skills or experience? These are issues that need to be considered early so they can be addressed where possible."

“For instance, if the future successor lacks the experience required to take the reins successfully, they can work outside the business or shadow the current owner to learn first-hand what they will be expected to handle.”

Upcoming changes to Inheritance Tax and Business Property Relief are prompting many higher-value businesses to review their position, particularly where company valuations exceed £5 million.

“With the Government choosing to raise the threshold for Business Property Relief to £2.5 million each for husband and wife from the originally planned £1 million, some family-owned businesses may find they fall outside the changes, although higher value firms still need to plan carefully around Inheritance Tax and succession,” Graham says.

Decisions such as gifting shares can reduce Inheritance Tax if the owner survives seven years, although this may transfer a pregnant Capital Gains Tax liability to the next generation.

“It is important to look at taxes together because they affect one another. An accurate valuation is needed to understand the overall position,” says Graham.

A lack of clarity can create serious difficulties if a business owner dies unexpectedly, leaving uncertainty around both tax exposure and the company’s ability to continue supporting family members and employees.

Graham shared that enquiries from business owners concerned about Inheritance Tax have significantly increased at his firm.

He encourages all family business owners to obtain an accurate valuation and plan early to gain more control over what happens next.

“Valuations should be reviewed whenever significant changes are being considered, including restructuring, redistributing shares or preparing for retirement, as well as when trading conditions shift materially in either direction."

“Without early planning, some businesses risk having to sell assets or even the company itself to meet unexpected tax liabilities.”

Lamont Pridmore is family run firm and offers a full range of accounting, tax, and business advisory services from its offices in Barrow, Carlisle, Carnforth, Kendal, Keswick, Penrith, Whitehaven, and Workington.

For more information about the firm, please visit here.