Business succession – keeping it in the family

Handing over a family business to the next generation may seem straightforward but it can create unforeseen problems.

In fact, succession plans involving family members may contain more risks than handovers involving complete strangers. With strangers, people tend to be cautious and get legal advice; with family they often rely on goodwill and a muddle through attitude.

For example, it is not unusual for a businessman to hand over his firm to his sons with hardly any thought as to how they should share control and make decisions about future policy, or how they should resolve disagreements.

The result is often bitter family feuds further down the line as siblings vie for control.

The way to avoid succession problems is to prepare properly and draw up a legally binding agreement.

One key requirement is a strategy for resolving disputes. This could be done by nominating an independent third party as an arbitrator. This should be someone who understands the business and is trusted by both sides. It could, of course be the person handing over the business, but an outsider might be a better choice as it avoids the problem of parents having to arbitrate between their children with all the resentment that can cause.

The first task of the independent arbitrator would be to try to help the two sides reach agreement. If that proves impossible, the arbitrator could then make a decision on principles set down by the parent and the successors when the handover agreement was drawn up.

However, if disputes are impossible to resolve, it may be necessary for siblings to end their business relationship.

This could be done in several ways. For example, the business could be sold to a third party, in which case the handover agreement would need to state how the proceeds should be divided.

Alternatively, one sibling might buy the other’s shares. In that case, it would sensible to set out in advance how the shares should be valued. The valuation could be based on the company’s assets, its profits or by some other method.

Throughout succession planning it’s important to get advice from your accountant, lawyer and possibly your bank manager.

Professional advice is important in all succession planning but particularly if you are passing the business on to family members because emotions can easily get in the way.

Sons and daughters may feel guilty that they are demanding too good a deal from their parents, while parents may feel they are taking too much out of the business making it difficult for their children to succeed in the future. Independent opinions from lawyers and accountants can help guide and reassure both sides.

It may seem counter intuitive but the closer the family relationship, the greater the need for a formal agreement. After all, if siblings fall out in future they may not only destroy a business, they may also destroy family relationships.

Please contact Sarah Liddiard if you would like more information about the issues raised in this article or any aspect of succession planning.