As a business owner, it can often be difficult to decide how best to hand over the running of the company to future generations. 

Not only is timing critical, the perception amongst suppliers, customers and employees, has to be taken into account. Business owners will also need to consider what form of management structure or control the next generation will operate under.  

It could be that making one daughter the Managing Director over another son causes conflict and will create a dispute within the family, which may ultimately have a detrimental impact on the business and family relations.

When we have been approached by parents wishing to hand over the family business to the next generation, we have looked at possible ways in which a demerger may provide their children with a suitable business opportunity. This is to cater for their future needs and also enable the parents to exit the business. 

A demerger will not be the right option for all businesses and may not be possible for every business, but in the correct circumstances, it might be perfect.

What is a demerger?

The main principle of a demerger is the transfer of the assets of a company to some or all of its shareholders. More often than not, the demerger will involve the transfer of interrelated assets, which, on their own, would be capable of forming an ongoing business.

How to demerge a business

A demerger can come about in four different ways, but, principally it will either involve:

• a dividend in specie being declared by the company, which moves assets to its shareholders, or;

• through a capital reduction or liquidation which both also see the assets of the company moved to its shareholders. 

Each method will have its advantages and disadvantages meaning that careful planning will be required. More often than not some basic steps, such as creating subsidiaries or holding companies will be necessary to ensure that the assets are in the ‘right place’ prior to the demerger.

As with many corporate reorganisations, demergers are generally a technical process, which will often see solicitors and accountants work closely together. This is to ensure that there is both an equitable division of any assets and also that there are no adverse tax consequences as a result of the proposed course of action. 

Frequently, HMRC approval would be obtained to ensure that any tax reliefs or clearances are obtained before proceeding with drafting the legal paperwork to give effect to the demerger.

How does a demerger help a family business?

The use of a demerger gives your children the opportunity to develop their own strategies and ideas within a business or enables the business to be tailored to their specific strengths. 

An example may be a car garage with a sales court, where one child is more adept at car sales and the other more mechanically minded. 

A demerger could see the car sales side of the business transferred into a new company for the benefit of one child, whilst the repair garage is transferred to an alternate company and operated by the other child. In this situation, it may be that the parents retain ownership of the property and receive a rental income from the two businesses as a legacy income.

Even if the children to whom a business is being transferred do not have specific strengths, a demerger may still be suitable. 

If a company operates from a number of different premises, take a small restaurant chain, for example, it might well be possible for each of the premises to be demerged into their own separate company. Each of the separate premises can then be operated and owned by a different child. 

In the case of a farming company, it may be possible to subdivide the farming land and demerge into separate companies. Another option could be to retain the land within one company but demerge the farming operations to another company.

Parents may well feel that a demerger is not necessary and that their two or three children can work together. However, if each of those children has a further two or three children it is easy to see how the family business can be stretched and future ownership and control issues may arise.

At Birkett Long, we have advised various different companies and shareholders on the different forms of demerger and helped families separate their businesses for future generations. 

We would be pleased to discuss how we may be able to help you undertake a demerger, or identify other ways in which you can pass your company to your children.