When is THE right time to plan for succession in the family business?

When you try to plan for succession to your own estate by making your Will, it’s never the easiest thing to do. There are increasing numbers of relationships which are euphemistically called “modern families” where there are children from different relationships, step-children and half-brothers and sisters. Getting it “right” can be a real challenge.

When you decide to plan for the succession of the family business you’re likely to face all of these challenges as well as a wide variety of business issued that you also need to address.
Did you know that more than 70% of businesses in the United Kingdom are family businesses?

According to the Coutts Institute in its publication “Successful Succession: options for passing on your business”, fewer than 13% of family businesses make it past the third generation. Perhaps the old adage that the first generation earn the money, the second generation maintain the money and the third generation spend the money is true after all!

Perhaps preparing for succession of the family business is a bit like people deciding to make a Will – where only 39% of people in Scotland have actually made their Will! There doesn’t appear to be any logical reason for putting it off – but that’s what happens and it means that succession planning tends to happen when there is a crisis of some description – and the best decisions are never made in a crisis!
One reason that the question of succession is delayed is the unwillingness to face confrontation. In almost all instances, some family members are involved heavily in the business whilst others may have absolutely nothing to do with it and have their own careers. So, who should benefit from the handover – all family members or only those working in the business?

Succession is usually a generational challenge – the founders or older members of the family wishing to retire and hand over to their children or their grandchildren. The problem with that is that the older we get, the greater the chance of a crisis – either through ill health or even death. When this happens, feelings run high and the best decisions are never made when emotions are in this state.
You also have to consider the potentially contentious challenges of the ownership of the business and the management of the business – where there may well be ownership across the wider family but only a small number of family members who actually run the business.

Where do you start?
You should start by looking at the business and set down an ownership plan. This would include looking at the structure of the business. For instance, a partnership may well have been exactly what was required when the business was established but that structure might not be the best vehicle for its current needs.
You also need to think about how any partnership or shareholding interest can be properly divided amongst the various family members. Should there be any distinction between those family members working in the business and those who don’t?

You also need to consider what might happen if one family member is divorced by his or her spouse and the potential impact on the ownership of the business should that happen with the “non-family” spouse seeking a share in the business.

Management of any business is challenging and none more so in a family business. You need to consider are those who own the business the best people to run the business? Would it be sensible to hand over management to a family member who has no expertise or interest in running the business just because they own part of it? This can lead to disaster!

The title of this article asks the question about when THE right time is to plan for succession to the family business and the answer is quite clearly – now. Don’t put it off and do what all prudent business owners do – plan properly for the future and keep it under continuous review.

In the family business, you should consider the three core aspects of family harmony, family ownership and family management and decide which combination of these three things ensures the continued success of the business.
Discuss your options with your professional advisers – your lawyer and your accountant will play a key role in this – and review your business vehicle and how you can best structure your succession plan.  When doing this, it also pays dividends to ensure your own Will is up to date and having a Power of Attorney might not actually be a bad idea either just in case something “bad” happens to you that might just prevent you from running the family business!

If you would like to meet to discuss this, please call us on 0800 005 1755 or email us now to arrange an appointment.