How family businesses can plan to hand over to the next generation
Family businesses are the backbone of Scotland’s economy and, according to the Scottish Family Business Association, account for about 45 per cent of the country’s GDP. But, to ensure that each family firm succeeds through future generations, it is vital for their owners to prepare a thorough succession plan well in advance.
Those whose businesses are in their infancy often believe it is too soon to shape such a strategy but Malcolm Rust, partner and head of the private client and charities team at Shepherd and Wedderburn believes otherwise.
He has more than 25 years’ experience of assisting family businesses at all stages to establish and review succession strategies, not just for the next generation but – crucially – the generations thereafter.
Rust explains: “For start-ups it seems less obvious, but I advise all clients to review their succession affairs every five years.
“For businesses looking towards and beyond a five-year time frame, it is probably appropriate to have any succession agreement reviewed, if there is one, or to put one in place if not, and a large part of the assessment depends on whether it is a business the owners wishes to pass on to future generations or other family members.”
Shepherd and Wedderburn’s approach to advising family businesses is multidisciplinary, drawing on input from lawyers across the firm – including corporate finance, property, tax and employment specialists – to advise on the full spectrum of issues relating to family-owned enterprises, particularly generational succession planning.
The close familial bonds inherent in a family business can be complex but can also have advantages over businesses with no family connection among their principal leaders.
Rust says: “The positives will more often than not outweigh the negatives, and we often also see it with employees who tend to be proud to work for firms that have been in the same family for generations. There is a solidity and permanence to the business for them, and a feeling the owners are not just in it for the money.
“Business owners often feel a duty and obligation towards their workforce. They genuinely feel it is not all about them or the family but it is about the workforce as well, and show this by giving them support, employment, and career opportunities. Equally important, they see themselves as custodians of the business for future generations of owners and employees.”
Fundamental to effective succession planning in a family business is having a road map – often in the form of shareholder or partnership agreements. These can govern the transfer of shares on either a sale or death, and Rust underlines the importance of having correctly worded contracts in place. He explains that their importance cannot be underestimated because they can give certain rights and powers to other shareholders.
“Sharing information and communicating effectively are key attributes for any successful family business,” Rust explains, pointing to a recent matter upon which he advised involving a family business where various members of the family had come to distrust one another.
“The three children who were involved in the business were not discussing anything with each other and they thought that because their father wasn’t discussing anything with them that he was favouring one of the siblings over the others,” he recalls
“They had created this monster in their own heads as to what was going on, when the reality was actually quite different.”
To resolve the issue, Rust suggested calling a “family AGM” to ensure that family members met regularly and openly discussed the succession plan for their business.
“The first one wasn’t easy, but we ran over four meetings initially and the family are now meeting regularly and have reached a stage where they can do so without having a solicitor in the room,” he says.
Whether the issue is succession planning, family representation, shareholder relations or strategic planning, it is important for family businesses to be able to rely on professional advisors such as Rust who have the expertise and experience to guide them through the various legal issues that arise as their enterprises grow and develop.
Rust elaborates: “Those family firms that succeed tend to be the ones guided first and foremost by what is good for the business, rather than what is good for the family. Often it is about these businesses being led and developed by those who have the necessary skills, rather than by individuals solely because they are members of the family. These businesses do not shy away from making tough calls, particularly when it comes to deciding what the business requires by way of skills in its senior people.
“Each business is unique in terms of its personalities and operations, and there is no single solution that suits everyone. We offer a route to succeed in the context of a particular enterprise, having been briefed on all aspects of the business and the family, and understanding exactly what they wish to achieve now and in the future.”