Succession for Family Businesses
Preparing for the next generation to take over is obviously particularly important in a family business where the family wish the dynasty to continue.
But this isn’t easy by any means, as family structures change and don’t necessarily share the same values or approach as previous ones. Nevertheless, good advance planning can help smooth the path. Key factors include the following.
• Perhaps the first key objective is to ensure the business is protected from unforeseen future circumstances, such as unexpected death, divorce, insolvency or simply a family dispute.
• The second normal objective is to ensure continued practical and effective control, irrespective of which family members actually hold shares.
• One fundamental decision therefore is who should be able to hold shares and thus ensuring there is the right degree of continued control.
• Generally, some form of restriction on who can hold shares is desirable and practical, to avoid an ever widening and thus unwieldy shareholder base.
• It could initially be a chosen successor, if so how will other family members be compensated, if at all?
• Shares could be restricted to just the next generation, which can be effective in addressing potential problems of control.
• If a wider ownership is desired, will this include only direct bloodline family? If it includes their spouses, there is a danger that the business may gradually leave actual family control, for example if a family shareholder dies and their spouse remarries, subsequently transferring the shares to the new spouse or children.
• In the absence of direct instructions from current shareholders, a clear shareholders agreement that covers all these basic issues is an obvious practical step.
• In any event, some form of clear instruction about the future transfer of shares is crucial, for example, guidance as to how shares should be valued, and how transferred in the event of unforeseen eventualities.
• Unfortunately, family disputes, sometimes severe, are by no means uncommon and can seriously endanger a business. There must be clear direction as to what action is taken in such circumstances. One method is “compulsory transfer” where under given circumstances, for example personal insolvency, shareholders are compelled to sell their shares back to the family.
• Last but by no means least, families must protect their businesses from the effects of untimely death of a key shareholder. It is absolutely essential that key family members have made a Will, as dying intestate can lead to prolonged Probate delays which may materially affect the running of the business.
As with all such issues, common sense and good planning are essential, but proper professional advice on structuring and drawing up key agreements is always highly desirable.
7 June 2018