Launching any business requires initiative and investment
By James Brown, Managing Partner, Hall Brown Family Law
Getting any company off the ground requires initiative and the investment of both money and effort.
Keeping it going requires those behind it to take a rather dispassionate view about how to sustain success.
As someone who started a business less than four years ago, that’s a perspective with which I’m very much familiar.
Myself and the co-founder of Hall Brown Family Law, Sam Hall, have been fortunate to see our staff and client numbers increase.
Before we opened our doors in April 2016, we were already aware of the importance of considering what was required beyond the first stage of growth.
Succession planning is, of course, vital for any firm but it’s arguably most critical for family businesses.
They may not necessarily begin with any long-term objectives in mind. Quite often the focus is simply on developing a commercial enterprise which works and then building momentum.
Nevertheless, as they grow and become more profitable, many entrepreneurs come to view their companies as a means of providing income and employment not only for themselves but also for their spouses, children and siblings into the future.
Now, having a number of family members working for and committed to a business’s progress can be a recipe for success. Everyone, it seems, is pulling in the same direction and not being beholden to external – perhaps institutional – investors allows them to take a truly broader view of where a company is going and how it gets there.
Yet almost two decades as a family lawyer have taught me that despite those good intentions, family relationships are one of the biggest threats to a company’s viability.
You might assume that I’m just referring to the potential for family members to fall out with one another. Consider, then, how a divorce involving a business founder, director or shareholding relative can throw a successful brand off-track, even generations after they first began to trade and founders have stepped down or passed away.
You might also interpret those kinds of pressures as peculiar to smaller firms, less able to withstand the buffeting caused by having a founding director forced to take his eye off the company ball to deal with a divorce and perhaps required to hand over a stake in a business as part of a settlement with a former husband or wife.
I can assure you that it’s not only SMEs which can suffer but much larger and much longer established enterprises too.
Just as with any other aspect of business planning, such turmoil can be avoided but it is an area which needs the input of those experienced not just in the fine print of commercial deals but marital contracts too.
I’ll give you an example.
One of the relatively fashionable elements of family business planning in recent years has been the Family Investment Company, or FIC, for short.
They have become more frequently adopted by family firms looking for tax efficient ways of passing wealth down through the generations.
An FIC is a private company into which assets of a family business are transferred with intended beneficiaries assigned shares in order to minimise the risk of Inheritance tax (IHT).
That’s one reason why FICs have been preferred by some entrepreneurs and their financial advisers to trusts. From a purely corporate point of view, they appear to make perfect sense.
However, they carry significant potential consequences should one of the beneficiaries divorce as a family court can take any shares in and dividends from an FIC into account when it comes to dividing a couple’s joint assets.
The FIC is not bad in itself but really shouldn’t be used in isolation as it offers little protection to those with an interest in them in the event of relationship breakdown.
Otherwise, therefore, a structure created to avoid a 40 per cent IHT bill risks leaving someone open to a what might be described as a ‘divorce tax’ which could amount to 50 per cent instead.
A pre-nuptial agreement (or post-nuptial agreement, depending on when the FIC is set up) can specify, though, what assets are to be included should a couple’s marriage not last the course.
It illustrates that, for the 4.8 million family businesses in Britain, succession planning is as much to do with the relationships of the families who develop them as the recruitment and retention of key non-family personnel.
For that reason – and even though it might not seem obvious – a family lawyer can be just as important to a family business’s chances of delivering corporate stability, longevity and success as a good accountant.