When planning the succession of a family business, the main aim is to make sure it thrives under subsequent generations. However, as the business is passed down over the years, it can become susceptible to outside forces such as death, divorce or bankruptcy or a wayward child – all of which can have a detrimental effect.
- Death: The death of a shareholder may mean that shares are left to a person or persons that the other shareholders aren’t best pleased about. Even if a will does leave the shares in a certain way, it can be challenged if it does not make adequate provision for someone such as a spouse. In addition, dependent upon the nature of the business and how long it has been held, there may be tax of up to 40 per cent payable on death.
- Divorce: A shareholder’s divorce may also put ownership in doubt if the shareholder needs to sell shares or secure debt against them to fund a divorce settlement. Worse still, shares may need to be given to the divorcing spouse against the families’ wishes if there are no other assets to fund a settlement. With one in three marriages ending in divorce, this is a very real risk.
- Bankruptcy: If a shareholder becomes bankrupt, their trustee in bankruptcy will dispose of their shares for the best possible price, regardless of who the buyer is.
- The wayward child: Finally, a shareholding child looking to fund a certain lifestyle may seek to dispose of their shares for the best price, regardless of other family members’ wishes.
There are a number of ways to plan for these eventualities and, although they can’t guarantee protection, will go a long way to making sure the family business thrives despite external ownership issues:
* Trusts: The use of trusts rather than direct gifts either during your lifetime or on death will offer a greater degree of protection. There are often tax advantages to the use of trusts and a divorcing spouse will find it harder to attack assets held in trust rather than held directly. Assets in trust are normally disregarded during a bankruptcy. A wayward child would not be a trustee and so would not be able to dispose of the shares.
* Pre/post nuptial-agreements: Encouraging children to enter into a pre-nuptial or post-nuptial agreement prior to marriage will offer them greater protection in the event of a divorce.
* Family charter: While not necessarily offering the same protection as a trust, a family charter may at least allow family members to veto any shares being transferred outside of the family.
In the series of articles over the past three weeks, I have shown the importance of careful succession planning to protect the family business. While planning cannot guarantee the success of the business, it can give it a better chance of surviving, not just through the next generation but for many generations to come.
Paul Bricknell is a private client associate at law firm DWF.