When family ties unravel

By Ged Henderson

05 Apr 2022

Nothing delivers a TV ratings winner like a business family at war. From Dallas in the 1970s to the recent hit comedy drama Succession, everyone loves a big boardroom bust up.

However, in the real-world family disputes are far from entertaining for those caught up in them and can cause businesses real harm. They can even be terminal for the venture.

When relationships go sour the fallout can be devastating for all concerned. The Institute for Family Business (IFB) says that family businesses are “especially vulnerable” to relationship conflict and in the long term that can have disastrous consequences.

That’s why experts say tackling questions around governance, succession planning and next generation engagement as soon as possible can be vital to ensure long term success.

Claire Hewitt is a consultant at Burnley based CUBE HR. She says: “The success of a family business relies on the long-term vision and management, alongside protecting values and legacy.”

She says that there are several measures that can be taken to prevent family matters getting in the way of business ones.

Claire adds: “Getting the structure right can ease any tensions and the correct legal agreements will protect the company’s shareholders, leading to less risk of damage to the company’s integrity and reputation.

“Whether the business has full family control or non-family shareholders, ownership can get confusing so relying on trust alone is never advised.

“Written agreements between family members involved in the business will be required as there are just some situations where a handshake will not do. Legal protection can be provided for all those involved if the correct legal agreements are in place.”

Putting a shareholder or partnership agreement in place will govern how challenges including illness, fallouts, breakups or even death are dealt with.

A written mutual agreement – best prepared when a business is first established – will cover the funding, structure, management and future direction should any of these issues arise. Ben Smith, director at Blackburn headquartered business advisory and accountancy group Pierce, says: “With a fair wind, a shareholder agreement sits in a bottom drawer forever and a day but is there for everyone’s protection in the event of a fallout.”

When it comes to thorny subject of succession planning, Claire says: “It is vital that family business owners create succession plans so that they have a strategy in place to ensure future success.

Moving forward can be extremely difficult if individuals have not been prepared for future work responsibilities, or even worse don’t want them.

“This will involve aligning the family vision with the business strategy and training future leaders with preparation for the transition.”

Getting succession planning right will also help when it comes to building a successful exit strategy. Claire says: “For most, this will mean preserving the legacy by passing control to another family member.

“Consideration will need to be given to whether this is the right decision as they might not have the right education, skills or experience, but early planning and consultations will get the business in shape for any departures.”

Ben agrees. He says: “Forward management succession planning is critical to facilitating a successful and high multiple exit.

“Fail to plan; plan to fail – it is no different in a sale process. Tidy all aspects of your business’ affairs ahead of a sale and plan ahead.

“In a rapidly changing economic environment, ensure your corporate structure ensures maximum protection against downside risk. Make sure your assets are sited in lower risk environments, be that parent companies, pension schemes and others.”

Jenny Pape, tax partner at business advisory and accountancy group Azets in Lancaster and Preston, says: “There is a saying that one generation earns the wealth, the next maintains the wealth and the third generation spends the wealth. “Breaking this cycle is important, and as custodians of ‘the wealth’, one of the biggest responsibilities for the family is to plan for succession.”

Reasons for succession planning vary from family to family, but common triggers include too many generations in the business making it unwieldy to manage.

There may be a desire to make provision for adult children who are not part of the business, younger family members may be joining, or someone is looking to retire or make an exit. High levels of conflict or a frustrated family member can also send the subject to the top of the agenda.

Jenny says: “The earlier a plan is made the more options there are available. It is a longterm strategy that requires thought and buy-in from all parties involved.

“There are many tax implications related to the transfer of assets and these can have a large effect on those inheriting assets and businesses.

“Decisions on the division of assets within a family have long term implications. The aim is to have good communication with all parties to minimise the risk of expensive family conflicts and division which can occur many years in the future.

“It is useful for families to openly discuss the issues in order to reach an equitable or practical solution.”

She adds: “Once the business and family issues are understood, the starting point is often to look at the financial statements to establish who owns what, how much is it worth, and ultimately assess what each family member’s shares or capital account is actually worth.

“Because financial statements record property at historic cost, there is usually a need to revalue property to market value. The stage the succession journey is at would influence whether an informal estimate of value is sufficient or whether a professional valuation is required.”

After real values, pension funds and potential tax liabilities are established, the next step is to consider income requirements of the different generations, review existing bank debts and assess the capacity of the business to repay existing or potentially take on new debt.

Options for creating separate businesses, allowing family members control of their own destiny, may also be considered.

Jenny says: “Once all these facts are assembled, formulating the plan and getting it written down in black and white for review and revision is the second hardest part, after actually starting the process.

“The written plan may contain a series of different options, with the pros and cons of each. Encouraging all parties to discuss and build the plan will assist with buy-in.”

Enjoyed this? Read more from Ged Henderson

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