Stuart Duncan: Forward planning vital for family-owned businesses

Stuart Duncan is a partner and family business specialist at Davidson Chalmers
Stuart Duncan is a partner and family business specialist at Davidson Chalmers
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A 2017 study by Family Business United Scotland reported how the top 100 family-owned firms generated £1.1 billion in collective profits and supported more than 103,000 jobs. The study highlighted how family-owned businesses are among the most profitable in Scotland, including well-known companies like William Grant & Sons, Arnold Clark and Balmoral Group, with a combined turnover of £16.6bn.

The support that specialist lawyers provide for these businesses can be a key factor in their success, not least on the potentially thorny issue of succession, often more complex within family-owned businesses. If not carefully managed, often with the help of an impartial legal adviser, it can lead to conflicts and a break down in relations between family members, all of which can have a damaging effect on the business.

19-05-2015. Picture Michael Gillen. GRANGEMOUTH, Arnold Clark garage, Beancross Road. Used car sales forecourt. Complaints from residents over various issues.

19-05-2015. Picture Michael Gillen. GRANGEMOUTH, Arnold Clark garage, Beancross Road. Used car sales forecourt. Complaints from residents over various issues.

When a family business owner is ready to move on, they have the following options: sell to an outside third party or pass it on to either the next generation or to existing employees (or a hybrid of the last two).

Often the owner will need to realise cash on a disposal, regardless of whether the business is being passed on to the next generation or sold to employees or another buyer. While there can be problems in terms of valuing the business when it is being sold to external parties, bigger issues can arise when it is being kept within the family.

A common problem is the frictions that can arise when the owner passes on his shares to those members of the family who already work in the business. This can cause resentment and even hostility among those other members of the family not involved in the business.

One solution is for the owner to communicate with those family members who do not operate within the business to assure them that the apparent inequitable situation will be rectified posthumously in their Will. Another alternative, often effective, solution is for the owner’s shares to be split into two separate classes at the time these are transferred to the family members. One class is given restricted voting rights (for those not involved in the business) while the class of shares for those who do work within the business are given full voting rights. Both classes would have full rights to income and capital, thus ensuring financial equality, whilst at the same time ensuring that those family members running the business are left to get on without undue interference from those who are not involved.

There are also other succession-related issues to contend with before a family business passes over where sound legal advice at an early stage can help effect a positive outcome. This includes addressing an owner’s reluctance to plan ahead. This can be a result of them not wishing to acknowledge their own mortality or having a fear of retiring without a proper pension or income stream.

It is, however, important for the business owner to sit down and discuss this important matter with the other family owners in order to put a plan in action. This would cover key issues including the timing of the handover, which could be phased, the extent of the owner’s involvement after this has been done and financial arrangements such as the payment of a consultancy fee or other considerations for the transfer of shares. Involving a professional advisor such as a lawyer or accountant who has worked with the business owner and family members in the past can help ensure the best outcome as this can often be a highly sensitive discussion.

Perhaps the most challenging succession issues within a family business, and one that can evoke sibling rivalry, is whether certain members of the family have the skills necessary to drive the business forward after the current owner has moved on. Preparing a focus document or family charter which is not legally binding, but which sets out the aspirations of how the business should be taken forward post-handover can help overcome this problem.

Given the importance of family-owned businesses not only for those who make their living from them but also to the wider economy, it is critical that the challenges of succession are managed well in advance.

Stuart Duncan is a partner and family business specialist at Davidson Chalmers