For those in family businesses, planning for the future is not only important individually, but also for their family business. Whilst many people have there own will in place, those individuals must also consider these in the context of their business and whether they reconcile with the future plans of their business.
Family businesses are central to the UK economy offering stability and responsibility to their communities in a variety of different sectors. According to The Institute of Family Business, two thirds of UK businesses are family owned which equates to approximately 4.7 million in total, employing almost 12.2 million people in the UK.
Some of these family businesses can be several generations old and typically think in terms of generations, rather than years, or even months. Unfortunately only 15% of these businesses have anything that would resemble a succession plan. Succession planning is important for the future stability of any family business and is frequently an unspoken subject for many family run businesses. With over 100,000 family businesses transferring ownership between generations each year, planning for this eventuality will help smooth over that transition.
Every family business will be faced with the option of keeping the business within the family or selling to a third party in its lifetime. Having acted for successive generations of family businesses, we have experienced these situations whether planned or unforeseen. Planning for these events should be carried out as early as possible to aid any handover of the business.
Keeping the family business, in the family
When the older generation business owners want to retire, the first port of call is considering transferring their interest to the next generation. It is often assumed the younger generation will take over and carry on as the senior family members envisaged. However, this is not always the case. To avoid any sudden revelations, ensuring that the business has either a comprehensive and collectively understood family charter (sometimes called ‘family constitutions’ or ‘protocols’) or a shareholders' agreement can be crucial in navigating the transition of the family business between generations.
Family charters are statements of intent entered into by the family members in relation to a family business. Normally they are not legally binding. Some parties to the charter may not even be shareholders' but only beneficiaries of a family trust which owns shares in the business. Alternatively, a shareholders’ agreement governs the relationship between the shareholders of a company and details how the company should be run including the process of transferring shares. It is normally legally binding.
Selling the family business
Whilst some families start a business with an ultimate sale being the end game, others may only consider this conclusion out of necessity. Deciding whether to sell may, understandably, be as much an emotional decision as a financial decision. There are many families, whose motivation for being in business is about extending a legacy rather than maximising financial return to the current generation of owners.
Making the sale process as smooth as possible starts in the exit planning. Detailed exit provisions can be included in the constitutional documents of that business. For example, founder members can guarantee minority members agree to third party offers and prevent dissent amongst family members. Ensuring the business owners are clear of their rights make it more likely that the sale will be straightforward.
An alternative to selling the business to a third party is that some families may want to consider recruiting outside managers, moving the business to being family owned rather than entirely family run. This will allow the family to still be involved but do not necessarily have to work within the business.
Whatever the plan, a well-managed succession process can be uniting for the family business, allowing it to reinvent itself in response to changing circumstances. This is even more important now with people having children later in life, meaning that the next generation may not yet be ready to take over when the current owners aim to retire. Ensuring that the process is started early with the right documents in place can aim to make any handover straightforward.