Family Businesses – some considerations about succession
Episode 5 of Can't Take It With You looks at two family businesses and the problems that can arise for parents when considering succession. When dealing with a family business, it is important to consider carefully how best it should be passed on to the next generation, both from a management perspective and from an ownership perspective, taking care to ensure that an acceptable balance is struck between the interests of those children who work in the business and those who do not, whilst also endeavouring to ensure the continuance of the business as a going concern. A carefully drawn up will plays an important part in such a process, though it is crucial to ensure that all of the family are aware of the plans for the family business and how they stand with respect to it. The two families in the episode of the show both had such dilemmas as to the future of their respective business and had to consider how best to deal with such issues when preparing their wills and considering their estate planning generally.
One important issue which family businesses will need to consider (and which, although discussed with the families at the meetings, was not shown in the episode itself) is the question of inheritance tax. Certain business assets will qualify for business property relief but there are a number of conditions which have to be met if the relief is to be granted. If the relief is not available, there could be substantial inheritance tax to pay on the second death.
Succession of family businesses
If pressed, most, if not all, individuals with family businesses would like their business to continue for generations to come and are keen for their children and wider family to be involved in the business, but are not always sure as to the best ways to go about it. It is received wisdom that many owner/managers of family businesses find it very difficult to give up day-to-day control of their family business and to hand over the reins to the next generation during their lifetime. This is often especially the case when an individual or couple have created a family business from scratch and are loathe to acknowledge that the business can (or even at times should) go on without them. For such people, as a process, succession can be very difficult to contemplate or manage. However, given the number of family businesses which fail within 2 or 3 generations, often due to there not being a carefully thought out succession plan as to both management and ownership, it is perhaps more essential than ever to ensure that you have thought about what is going to happen in the next generation and put a structure into place to ensure that this is effective.
Lifetime succession and succession on death
When considering succession in a family business, it is important to look at both lifetime succession and succession on death, though the use of wills, trusts and other estate planning techniques. Factors which should be taken into consideration when looking to pass a business onto one's children are the extent to which some or all of the children are interested in the business and indeed working in the business, the interests and views of any children who are not interested in the business, together with one's own ideas as to succession and the future of the business.
Equality between children or an increased share for those working in the business?
If questioned, the majority of parents would like to treat their children equally. However, many parents would also think it fair that if certain children worked for a family business and helped make it a success, that such children should benefit more from the family business than those who did not (and this is a view with which those children who do work in the business would normally strongly agree). The concepts of fairness and equality are somewhat in conflict here and this is an issue with which many parents as family business owners find themselves struggling. One solution, provided that there are other assets available is to compensate the non-business children from such assets, but even this can cause problems, given that the children working in the business would often expect or wish to receive more realisable assets of their own. Deciding upon an ownership structure for the next generation can therefore be much more difficult than it sounds, though there are various solutions and options available.
Who should be appointed to manage the business?
As well as these problems of ownership, succession can also lead to questions as to management and who should be in charge of a business once the patriarch or matriarch steps down. Sometimes there will be an obvious candidate, acceptable to all, whilst on other occasions, there may well be no one individual who is best placed to take up such a role. It is important to ensure that a family member is not put in charge simply by virtue of being a family member as this is a sure fire recipe for disaster in the long term, but, equally, where there are several qualified family members, you do not want to appoint the individual who might cause friction with the others. Again, proper consideration and consultation are key.
Family creeds
In order to come up with a carefully thought out succession plan, which should be factored in to both lifetime planning and your wills, it is best to discuss the options available to you widely with your family and any trusted advisers so that everyone is aware as to where they stand and so as to maximise the chances of a smooth succession. Many families often find that creating a family creed or charter which helps set out the way in which they family and family business interact will focus their minds and enable them to come to some form of (hopefully harmonious) agreement as to the future of the family business, thereby doing their best to ensure that a first, second or third generation family business becomes a fourth, fifth or sixth generation family business!
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