Michael Kelly: The challenges of family business

MacRoberts corporate lawyer Michael Kelly. Picture: Contributed
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I am a corporate lawyer working at the Scottish law firm MacRoberts. Like most corporate lawyers, the vast bulk of my time is spent advising clients in relation to either selling or buying a business or investment work.

Throughout my life, to different degrees, I have also been part of a family business. My dad was an ambitious and entrepreneurial businessman. He was not afraid of risk, and that brought many rewards and a number of pitfalls. He enjoyed relative success, but also suffered significant failures. His experiences in business ultimately shaped my own future professional and business life.

Commencing the formal administration process is the inevitable end for a business that does not seek to address the source of the illness

Michael Kelly

My dad’s business fortunes broadly oscillated up and down over ten-year cycles. In 2004, he reached one of his high points, concluding the acquisition of a highly regarded competitor. In the previous five or six years he had acquired four other companies. This acquisition business brought a new dimension to the existing group and presented good reason for considerable optimism about the coming years.

In 2008, my dad’s business entered administration. An insolvency event can be dramatic, far reaching and overwhelming. Creditors, employees, suppliers, the board, the local community, the business owner, and the families of all these people are caught in the storm. And then there is the indirect effect as the insolvency ripples through the business layers.

Whilst an insolvency event has a sudden nature about it, often it is a symptom of problems and issues that are much longer in the making. It is the ultimate symptom of a dysfunctional business that is often riddled with underlying problems that have been largely undetected by the outside world. A terminally sick business can stagger on for a long time, infecting many of those it comes into contact with. Commencing the formal administration process is the inevitable end for a business that does not seek to address the source of the illness.

With the collapse of my dad’s business and the dawn of the broader period of financial crisis in 2008, my brothers and I were faced with a dilemma. My father was 65 years old, and facing financial oblivion. As his business started to unfold he poured every penny of his personal reserves into the business in a futile attempt to prop it up. As part of the financing arrangements that underpinned the group’s acquisition history, he was up to his eyeballs in personal guarantees. So, we either funded the rest of my father’s life (and this was not something that would sit well with him), or we worked up another option. At that time I was a corporate lawyer with two years’ experience, and despite my relative inexperience, I worked up Plan B.

This series of blogs will plot the history of the family business that emerged from that dark period. Whilst the first three years were brutally challenging (in the first year we turned over less than £700,000 and incurred losses of approximately £300,000), this year we will generate revenues of over £10 million, employing more than 80 people and about to take access to new premises of 120,000 square feet.

Corporate transactions and arrangements have been crucial to this progress. But their success or failure rests on the steps that are taken before and after the corporate lawyer is involved. That is something that corporate lawyers do not generally see. We have fleeting involvement, essentially negotiating the detailed terms of the deal, but most corporate lawyers do not see the reality of these steps, and what it means on the inside of the business.

In the next five blogs I will outline the legal steps and challenges involved. In my next blog, I will tackle the topic of a “pre-pack acquisition”. For some, this has unsavoury connotations associated with phoenix companies, and shareholders and directors walking away from their own mess, unscathed and under the shelter of a new corporate vehicle.

I can say at this point that my own experience was dramatically different from that common perception. I will discuss the legal process itself, elements that make it unusual, and then the fallout and challenges that can be expected by parties adopting this nuclear option.

• Michael Kelly is a partner and corporate lawyer at MacRoberts

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