The Queen will celebrate her Diamond Jubilee next year. Although she has made no noises about retiring anytime soon, at 85 years of age, she clearly can’t continue in her role indefinitely.When and to whom she hands over the reins will increasingly become the subject of debate. These issues are mirrored in many family companies. Many entrepreneurs will have stayed at the helm to steer their business through the recent economic difficulties. Now that the worst is over, they may be content to let the next generation take control. But should the top job go to the patient deputy, or the more popular and able junior candidate? In a business, these are the issues that can make or break the family firm. A business, painstakingly built up over many generations, can be destroyed “overnight” as a result of the wrong decision. The choice of who should be at the helm is often the most important. After all, if you were interviewing for an outsider to take the role of chairman or chief executive, you wouldn’t ask whether he or she was the eldest child in their family. You’d be more interested in whether they had the necessary experience, flair and discipline to run the business. So why should it be any different for the family firm? At a client of ours, a successful fashion business was left to three brothers by their father: the middle son was the managing director while the youngest looked after the finances. The eldest brother was a dispatch clerk. This division of responsibilities suited the talents of each and ensured that the firm’s success was the main priority, far outweighing the sensibilities of any individual family member.
Who works in the business?The greatest problems can arise if some members of the next generation work in the business and others don’t. While the previous generation wishes to treat their children even-handedly by passing shares equally down the line, too often a feeling of resentment builds up when working family members view their siblings as sponging off the business. Some families address this by passing shares only to working children and “equalising the gifts” by leaving an equivalent amount of money to the other children on their death. However, shares are notoriously difficult to value and the non-working family members have to wait for their inheritance. There is no easy answer to this dilemma but communication is often the key. If the participants are party to the decision-making process, this can often eliminate many of the problems. Even then, just giving shares to children may not be the right thing to do. It can be very efficient for shares in private companies to be retained until death, rather than being gifted during lifetime. Moreover, the original owners may want, or need, to continue to derive an income from their shares. On the other hand, passing the shares around the family can often mitigate income tax liabilities, particularly where significant dividends are being paid. Perish the thought that the new Duchess of Cambridge could run off with the crown jewels, but this is a worry for many family businesses. Ensuring that shares do not pass outside of the family group can be of paramount concern but can be mitigated by the use of Trusts in certain circumstances. Finally, even family members often do not see eye to eye over business matters and might want to take the company in different directions. Interesting tax issues arise in “demerger situations” often enabling the business to be split with each party taking ownership of a discrete part of the business. Andy White is a tax partner at accountancy firm Carter Backer Winter LLP. Picture source
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