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Succession planning for a family business

02 July 2020 | Clare Hopkins

If you are heavily involved in the running of your family business you are likely to be spending all your working day (in fact probably more than the normal working day) dealing with such matters as production/service issues, suppliers, credit control, creditors, the Bank, and a whole host of other things. However, it is essential to find time occasionally for longer-term matters. One of those is succession planning.

Although we would like to think so, none of us is immortal and one day the business will have to carry on (or not) without those who currently run it. There can be a lot of truth in the old saying that one generation builds up a business, the next keeps it going and the third ruins it. Of course, within a family there may be no natural successors and the idea may be that when the current generation goes the business will be sold to best advantage. If that is the case then all that may be needed are Wills giving appropriate powers to the executors to carry out an orderly sale.

Many families would like to think that the business which they have built up will be there to benefit future generations, even if those generations do not themselves have the inclination or ability to run it well. The key to this is advance planning, usually by separating the management of the business from family beneficiaries. A typical structure will therefore be:

  • Professional managers, who deal with the day-to-day running of the company and are involved in strategic planning – rewarded by salaries and other incentives, probably profit-linked.
  • Shareholders who have ultimate control and may have influence over strategic planning – these may be family members thought to have the necessary skills and/or professionals
  • Shareholders who are other Family members who benefit from the trust but have no control over the company.

Succession planning of this sort should involve a number of legal solutions, including:

Shareholders agreements and articles

These regulate the interaction between different shareholders in different circumstances and can deal with matters such as a shareholder dying or becoming incapacitated or a shareholder wishing to sell. Generally speaking the object will be to keep the actual shareholding within a relatively tight family circle. These can be linked with appropriate life assurance products to provide funds for shareholdings to be retained within the family.

Wills

Everyone substantially engaged within a family business should have a properly drawn Will appointing executors with sufficient powers to deal with the testator’s shareholding and the wider implications of his/her death on the company. Wills are also often the appropriate vehicle for the creation of the sort of trusts referred to above (although trusts can be created during one’s lifetime). The absence of a Will brings into play the “rules of intestacy” which will usually be totally inappropriate to the situation and may cause a disastrous fragmentation of the company.

Powers of Attorney

If someone substantially engaged in a family business loses legal capacity, his/her management function and control of shares cannot be continued until someone obtains a Court Order, usually a difficult, lengthy and expensive procedure. The “period of uncertainty” can have an adverse effect on the company. To avoid this, everyone in this position should make a Power of Attorney, which is an advance appointment of some person(s) to have legal authority should loss of capacity occur

Specialist family business solicitors

At Gregg Latchams we look after our clients with wraparound services. This means our business solicitors work with our private wealth solicitors, enabling us to look after and advise you on a wide range of matters. 

If you would like to discuss your family business and succession planning with our specialist family business solicitors, please contact our team on 0117 906 9400 or email enquiries@gregglatchams.com

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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