Success is in the planning for family firms

As part of our special insight week looking at the issues surrounding family business Jane Shaw, director of Private Client Family Business Owners at Pannone Corporate, gives her own  take on the topic.

Those at the helm of family businesses spend many years building a successful firm to hand over to the next generation.

However as busy entrepreneurs, they are often immersed in the day-to-day running of the business meaning vital issues such as wills, succession planning or incapacity are overlooked.

Failure to deal with such issues can have catastrophic consequences for the survival of the family firm.

Family businesses are particularly vulnerable as there is often one controlling shareholder.

If shareholdings become too diverse following the death of the owner or divorce, or are simply diluted over generations, value built up over many years can be lost.

It is also vital to ensure that the right people have control over business decisions – control and economic benefit may need to be split.

With suitable expert planning a founder can ensure that chosen individuals have control as shareholders and directors whilst economic benefit can be passed to family members in accordance with his wishes.

The use of trusts is often appropriate where some family members work in the business and others do not.

There can often be tension between “working” shareholders wanting to reinvest with passive shareholders wanting to receive higher dividends.

Trustees (who may well be family members) can ensure that shareholder decisions are made by one body rather than multiple individuals.

This can be particularly important where a future sale is contemplated as unity of decisions helps to facilitate a smooth sale process.

Where trusts are used the relationship between the family and the board needs to be considered and it will often be appropriate to ensure that trustees as controlling shareholders are represented on the board.

Lifetime planning can also assist in allowing certain shareholders to benefit from future growth.

Different classes of shares can be created to allocate profit from a particular area to family members who may be running or developing that part of the business.

This can be particularly useful where two families or different branches of one family are involved in the same business.

Life assurance policies combined with cross options and trusts can also ensure that if one family member dies his or her executors can sell their shares back to the remaining shareholders to ensure that those who are actively involved in a business can keep control.

From a practical perspective where a business is run by one controlling founder, large amounts of important information regarding the running and financing of the business will be in his or her head.

It is often helpful to record this in a “roadmap” that can be found by other family members if the founder is suddenly not around or not able to communicate.

Business powers of attorney are also important in this respect to ensure that a business is not threatened by an inability to access bank accounts, pay suppliers etc.

Family businesses often overlook the risks of death or incapacity. Taking advice whilst everything is going well can ensure that the business is protected for future generations and that it can either continue to run efficiently and / or value is extracted as the founder would wish.

Successful family businesses are the result of hard work, dedication and commitment.

Taking time out to plan carefully for the future can ensure that the family firm is in excellent shape for when the time comes to hand over the reins to the next generation.