Planning can only be a good thing. All businesses are dynamic and family businesses are no exception. In fact, dynamism to react to changing circumstances, whether internal or external, is vital to secure the survival of the business beyond the short-term.
It is common for individuals involved in family businesses to work later into their lives than people who have, for example, spent their careers as employees in large organisations. The nature of a family business is that it is more than just a job: it is a way of life.
The decision to step back from involvement in the day-to-day running of the business is a difficult one for many but will inevitably come. The decision to step down is often predicated on having other family members, whether siblings or cousins of the same generation or children or grandchildren, who can take on a role and willing to do so. We help numerous clients every year to sell very successful businesses, from farming to pharma, where the next generation do not want to take them over. Ensuring that there is a family governance constitution in place at the outset will enable the family to express their core values and hopes for the business and ensure that planning for the long-term future of the business can be implemented.
Assuming that there are younger individuals within the wider family ready to step up, how is best to do this? Here, the family business structure offers considerable flexibility and an ability to transfer wealth to the next generation in a tax-efficient way, if planned correctly, hence the importance of seeking out expert tax advice at the outset. The shares in a company can easily be transferred to, or a partnership interest given to, the next generation in phases over a period of time such that the older generation still retain control, but the younger generation have a sense of ownership and buy-in to the business. This is achieved by revising the company's constitution, principally its articles of association to provide for the agreed balance of power between the generations – and in particular the voting rights afforded to different classes of shares and, at board level, to the family members who are the company's directors. The creation of different classes of shares also allows for different levels of dividends to be paid to reflect the different generations' need for cash at different stages of their lives. It is often also prudent in many circumstances to draw up a shareholders' agreement to augment what is in the articles and to deal with any specific, private family matters setting out how the value in the company is to be shared and who has real influence over its operations. These articles are publicly available at Companies House, whereas the shareholders' agreement is a private contract between the various shareholders and the company itself, as a separate entity, which is not in the public domain.
Another important consideration for the family when thinking about succession is the delicate subject of relationship breakdown between family member shareholders and their spouses, who may look to assert a claim over the shares in the company as part of a divorce settlement. It is important that the articles safeguard the family's interests by placing contractual restrictions on who can become a shareholder without the consent of the existing shareholders.
In contrast to large public companies, share options are of little real benefit to family businesses, as they do not afford the same level of psychological buy-in as having the shares themselves and, unless a sale of the company is planned or there is a market for the shares once the options are exercised, there is no opportunity to cash in the options and derive the financial benefit for which they are designed.
A number of the ideas summarised above can apply equally to non-family members, for example offering a new CEO of the family business shares of a particular class which have limited or no voting rights on key decisions, but with the idea of offering them something beyond a high salary and cash bonus. In that scenario, it is vital to ensure that the company constitution allows for any shares given out to the CEO, in our example, to be gathered back on departure – these are the so-called "good and bad leaver" provisions which are found in the articles of every venture capital- and private equity-funded company and which are of equal importance to a family business.
How we can help
We have extensive experience advising family businesses at all points in their lifecycle, including through the process of transition to the next generation.
We can assist with reviewing existing governance arrangements and ensuring that that are fit for purpose, providing stewardship and governance training to existing and incoming family management, and acting on your behalf as an intermediary in the context of discussions regarding the future of your business.
We are also well experienced in advising on corporate and business restructurings, including with respect to the tax.