In a previous article, we identified the uppermost concerns of a family when undertaking succession planning, and noted that owning a family business may be one such complexity requiring additional consideration.

Complexities of a Family Business

A layer of complexity may arise where a key family member has built a business and is now concerned with business succession, as well as the wider aspects of the family’s global estate planning. Succession issues for the family and the business are often linked, with the more complicated decisions regarding the management of the family business being made in light of the overall succession strategy for the family as a whole.

Managing Family Dynamics

Potential conflict may arise where key family members (other than the founder), or different strands of the family, are involved in the running of the business. Different family members may have competing interests and may have different expectations regarding the inheritance of the business. A balance must often be struck between ensuring the continuity and preservation of the business and family assets, and protecting and benefiting individual family members.

Potential conflicts between siblings must also be managed – for example, one child may have greater business skills and therefore have greater expectations, whilst their sibling may wish to simply ‘cut and run’ with their ‘share’ of the company. Further problems arise when a child is unwilling to join the family business when expected to do so, when family members wish to leave the business, or when children of the family marry and there is an expectation that the new spouse (who might have greater business acumen than the patriarch’s own bloodline) might join the business. What is that spouse’s interest to be, pure remuneration or an equity stake? What happens when a child of the family leaves the jurisdiction? What happens when there is a relationship breakdown, for example, as a result of divorce or family dispute, or where a child of the family becomes vulnerable to third-party creditors, or is simply a frivolous spendthrift by nature and needs protection from themselves? What if a parent simply favours one child over another?

Family Governance

Solutions to any possible problems must be bespoke and relevant to the family. Assumptions should be avoided, and there should be no temptation to jump to any solutions until all the issues have been properly identified. It is tempting for an advisor, when meeting with a family for the first time, to roll out a whole raft of documents designed to deal with all possible scenarios (often from a prescribed set of precedents). However, nothing is more important than the facilitation of an open forum for discussion between the family members, providing a platform for each key family member to raise their own particular concerns and issues.

Some families may not require any formal documentation whatsoever. The process of structured discussion, facilitated by the independent adviser, might be sufficient to set in place that family’s unwritten, but nevertheless effective, family governance structure. Other families might simply want a basic ‘Heads of Terms’. Alternatively, some families might want a full bible of documents to deal with every foreseeable eventuality. At first glance, this seems like the ideal solution, but in practice could be dangerous if the family become reliant on prescriptive documentation and is then unequipped to deal with any unforeseen eventualities. The most effective solution is often somewhere in the middle, i.e. a governance structure that is both detailed enough to provide clear and concise guidance, but wide and fluid enough to enable flexibility and change within the family unit and dynamics of the often-complex family relationships.

Trust structures are still widely used for succession planning, as well as restructuring an existing corporate entity, for example, a family investment company with a careful division of share rights.  There will be a balance to be struck between ownership/control and trust/discretion. A review of partnership or shareholders’ agreements might be necessary. It is important that these are not seen as stand-alone documents, but are integral to the overall family planning structure in order to avoid potential conflict and contradiction between them.
It is not uncommon for an individual to express a preference that the spouse and children ‘sort it out amongst themselves’ after their death, and this approach keeps our dispute resolution colleagues busy, but it is without doubt best avoided. A carefully configured bespoke governance structure, achieved as a result of continuing collaboration by the family, should be the preferred approach.

Tax v. Succession Planning

Family Business planning is not always led by a motivation to save tax. While many clients would prefer that their wealth is protected as far as possible from the tax man so as to optimise the value passing down, they are often more concerned with protecting the business itself for the next generation. The focus is frequently on preserving unity within the business and family, and ensuring harmony in the succession process.

Contact

Speak to our expert succession planning team at Lester Aldridge for bespoke legal advice that protects your legacy and preserves family harmony. Please get in touch with Lester Aldridge.