Many family business owners will want to pass their company on to the next generation.But the big questions are: who and when? These are just some of the factors that need to be considered:
Equality – Most parents will look to treat their children equally. However, for many business owners, the business is their main asset so it may be deemed unfair to pass it on to only those children who work within it. As not all the parents’ children may work for the business and therefore passing on shares to those who don’t may cause tension between working and non-working shareholders. This is particularly true where the working shareholders feel they are doing all the work while the non-working shareholders reap the benefit. Similarly, the non-working shareholders may feel the working members are drawing too much income and therefore leaving insufficient funds to pay fair dividends.
Control – Control of the business is also critical. Where no individual shareholder owns 51 per cent of the business, no-one will have absolute control and this may leave the business without clear direction if the shareholders cannot agree. This can become even more stark if the business has passed through a number of generations. Each generation is likely to dilute the shareholdings and pull the business in different directions.
Working within the business – Where there are a number of shareholders, they may all expect to work within the business, even if there is not a specific role for them. Similarly, they may expect their children to also work for the business at a certain level due to birthright. This can cause tension if other shareholders feel they are carrying a ‘dead weight’. Unearned promotions can also cause tension with non-family members working for the business.
Disposal – There may come a time where family members wish to dispose of their shares either by seeking a sale of the entire business or just their own shareholding. For example, an approach might be made for the whole business and there maybe disagreement between the family as to whether to accept the offer or not. Similarly, one family member might wish to dispose of their shares to other family members but failure to agree a price for the shares could create tension.
A Family Charter may be the answer. It’s similar to a shareholders’ agreement and can set out what should happen in certain circumstances to avoid dispute. It could include the following:
a) A mechanism for non-working shareholders to sell their shares to working shareholders at a preset price or formula
b) Rules governing what say non-working shareholders have in the running of the business
c) A set dividend policy
d) A formula for salaries and bonuses of working family members
e) A set of rules governing who can work in the business and the terms under which they earn the right to promotion
f) Rules governing the percentage of shareholdings required to force a sale of the entire business with an option to allow other family members to have first refusal for purchase.
Next week, I’ll look at how to protect the family business from external forces such death, divorce or bankruptcy. Stay tuned.
Paul Bricknell is a private client associate at law firm DWF.
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