Recently I had the challenge of helping a client and its managing director with his retirement. It’s never easy when a long standing director of a relatively small business wants to retire – the many roles and positions they play and hold make an apparently simple end to employment into a complicated personal and corporate transaction.
I have been an accountant for an (awful) lot of years and had acted for the business for a long time so I assumed I knew how it needed to be done. Reality showed that as always when dealing with entrepreneurs, there are angles/negotiations/issues which appear out of the blue. Normally these are the personal points, but sometimes there are technical accounting/tax queries which challenge you unexpectedly.
The process gathered momentum slowly over an 18 month period. It began with the business owners trying to find out the retirement plans of their MD, without triggering any employment law issues (as is usually the case the employment contract of the directors had not been updated with developments in the law, even when the shop floor terms and conditions had been changed).
Once agreement had been reached over a retirement date, there were two largely separate projects needed: succession planning and a financial settlement. The role of the business adviser can vary enormously depending on the relationships amongst the parties in the business and between each of them and the adviser.
In my recent case, the biggest issue was the succession planning. Operational roles needed filling (the managing director had key roles in technical development and in sales) and the supervision of the company required reorganisation. My role here was largely as a sounding board for the various parties to check ideas, along with maintaining communication – passions can get high in these circumstances and it is often useful to have an engaged outsider to act as a mediator.
As you would expect for an accountant, I had a much bigger role in the financial settlement. The underlying issues included the level of annual bonus due for the part year of retirement, the price to be paid for the options/shareholding held by the retiring director and the price of effective restrictions on him after he had left. Each of these had a tax consequence for the retiring director and for the company. In addition, the terms of the deal with the retiring director were communicated through me, to avoid adding further friction to the already tense succession planning situation. Assessing and advising (to the extent possible) on the corporation tax, inheritance tax, income tax and capital gains tax aspects of various payments while maintaining good relations with all concerned was challenging and time consuming!
We (the company owners, the ongoing management, the retiring director and me) eventually reached an acceptable arrangement. It was all signed up on the agreed retirement date and the business is progressing well.
I learnt a great deal from the process and my four tips for retiring company directors and businesses would be:
- Early consideration of these things is best – try to have an established succession plan in place to avoid being caught short by an impending retirement.
- Don’t underestimate the amount of time consumed by discourse between the various parties – these discussions can be sensitive and should be approached with appropriate tact and understanding.
- Even relatively small transactions can become complicated in their accounting and tax implications. This is not a matter of simply dotting I’s and crossing T’s, these are complex issues and should be treated as such and planned in advance.
- A business adviser should be used as a sounding board or intermediary by which the process can be streamlined, advising wherever possible. My experience tells me that an adviser should know when to take a step back and when to engage the parties. If not, these boundaries should be established promptly.
I’d be interested to hear about your experiences regarding retirement of company directors, so please leave a comment on this blog, drop me an email at firstname.lastname@example.org or call me at our Blackburn office on 01254 604308.
David Gorton – General Practice Partner