Succession Issues In Family Business
A growing awareness of the benefits that can be obtained from clear tax and succession planning has meant that many traditional family-run businesses have had to consider emphasising ‘business’ over ‘family’, which is never an easy decision to make.
Who Should Succeed?
The transition from founder to the next generation can be relatively smooth if there is a natural successor who has been involved in the business. Some families are not so lucky, either because there is no-one in the next generation who is interested in taking over, or because there is more than one family member who see themselves as the ‘natural successor’.
This can also arise when no family member is interested in taking over or, worse, when the founder is of the view that none of the interested parties have what it takes to follow in their footsteps. Evaluating the merits of a family member with a critical eye is always troublesome, even if the founder is aware of the need to prioritise the business over personal feelings.
One way to minimise succession issues is to put in place a written succession plan as early as possible. If there are internal family issues to be managed, then the discussions can be started early and worked through at a time of the founder’s or family’s choosing. Waiting until such time as circumstances (be it death or incapacity) demand action can lead to an unnecessarily stressful and rushed approach. The longer a founder has to plan a succession and mentor their successor the smoother the transition is likely to be.
The best run family businesses usually put in place a family constitution and shareholders agreement to provide a clear framework for how the business is run and to deal with succession planning. Typically, the family constitution will set out the ethos of the business, and the shareholders agreement will include:
- Mechanisms to encourage the next generation to participate in the business
- Restrictions and controls on the allotment or transfer of shares
- Whether in-laws may become involved in the business and what happens in the case of marital breakdown
- Most importantly, mechanisms for dealing with family disputes regarding the business
The process of agreeing the terms of a family constitution and shareholders agreement can help to identify and iron out potential difficulties and areas of conflict. The family constitution should be a ‘live’ document, reviewed periodically to ensure it reflects the views of current members. The shareholders agreement is the legally enforceable embodiment of the family constitution.
Comprehensive succession planning involves more than just identifying a successor and can entail restructuring the business. In the case of a company, for example, this could entail the creation of different classes of shares, with different rights attaching, or establishing a trust to hold shares for children (adult or minor), thereby allowing a founder to retain a measure of control.
Planning to engage the next generation in a family business cannot begin too soon and good communication is essential. The preparation of a family constitution and shareholders agreement with the family’s legal advisors provides a blueprint for dealing with issues arising within the family concerning the business, helping to avoid unnecessary conflicts.
For more information on succession planning, please contact Edward Evans, or your usual Beauchamps contact.