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  • Overview

    This article was originally published by Spears on February 26 2018.

    Family businesses are central to the UK economy, accounting for approximately a quarter of the UK’s GDP and employing over 12.2 million people. However, in a recent PwC survey, 43 per cent of these family business owners confirmed that they do not have any sort of succession plan in place.

    Succession planning is vital for the future stability of any family business. The succession plan should not only deal with the inevitable handover of ownership but also the unforeseen events that some family businesses can encounter during their lifetime. Not having a succession plan can bring a huge amount of uncertainty in the transition period for the business. This may have a detrimental effect in many ways, for example, on employee retention with employees losing confidence in the future of their employment. This period of uncertainty may also affect the relationships with existing clients and suppliers which may have taken years to develop.

    The survey found that almost half of the family firms interviewed stated that they have argued about the future direction of the business. The lack of an effective succession plan opens the door to arguments between the owners, which can escalate into full scale disputes.

    Disputes within family firms are often more complicated due to the extra layer of family dynamics and personalities involved. The longer the dispute, the bigger the impact it will have on the business. In a worst case scenario, where no careful consideration has been given to the future of the business, the family business can ultimately fail.

    Planning for succession should, therefore, be carried out as early as possible to mitigate the impact of any of these issues and there are a number of practical steps that will help achieve an effective succession plan.

    At an early stage, the current owner should consider the potential successor. In the majority of family firms, this is likely to be the younger generation but many firms now consider hiring outside managers. The decision should be taken as early as possible to ensure that the successor can successfully integrate with key clients and undertake any relevant training or development. The lack of a successor can result in the shareholders arguing over the direction of the company and the company stalling until a resolution is found. For example, a father and founder of a family business dies suddenly and he had not considered the identity of his successor. Due to this lack of planning, the father’s controlling interest is transferred to a disliked relative such as a second wife who has no interest in the business. Documentation can help prevent these types of situations.

    To alleviate any potential disputes and uncertainty that may arise on the handover of the business, the business should consider creating either a family charter or shareholders agreement. Family charters are a statement of intent entered into by the family members in relation to the family business. Despite not being legally binding, they will help provide clarity to all family members involved in the business.

    The creation of a legally binding shareholders agreement can also govern the relationship between all the shareholders. Any shareholders agreement should also have adequate provision on the transfer of shares in the company. Forexample, some shareholders may not necessarily want any of the shares to fall into the hands of any spouses or relatives on divorce or death. Compulsory transfer provisions in a shareholders agreement can ensure any shares are automatically offered to the other shareholders upon certain events.

    Depending on the succession plan, the departing owner may have certain tax liabilities, for example, Capital Gains Tax. It is essential that these implications are considered at an early stage to ensure that all applicable reliefs are utilised. This should involve discussions with an accountant about the tax implications of the different options.

    If the succession plan involves the eventual sale of the business to a third party, careful exit planning will help to ensure that the sale process is as smooth as possible. The departing owner should consider the creation of detailed exit provisions in the constitutional documents of the business such as bespoke drag along and tag along rights. This can help to ensure that minority members agree to any third party offers accepted by the founding or majority members.

    A well-managed and documented succession plan when started early can aim to make any transition of a family business straightforward.

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Jargon Buster