Succession for Family Businesses
This is the first in our new series
of Blogs on our core activity, the sale of small privately – owned businesses. We’ll be working through a
logical sequence of related topics, from the initial preparation stage through
to completing a sale.
In this first Blog, we look at one
of the key alternatives for owners to a market sale, and often an obvious and
indeed preferred route – family succession.
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
- 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.
3 September 2019