Comments from Holly McNeil, B P Collins’ corporate and commercial associate, and Laura Mortimer, family partner, featured in an article in Business Insider South East about running a family business. This article includes their advice in full below focusing on what owners need to consider.
What factors should family business owners think about when working with relatives?
Holly McNeil, B P Collins, corporate and commercial associate: The owners should consider whether the family can work together – if there is already tension between the family members (which could be for any reason) then putting them in a business situation is likely only to increase such tensions. Do the family members really want to be involved and if so why? Are they just agreeing to be involved to keep people happy? Do the family members have the necessary skills (or can they gain those skills).
The issues can become even more focused if the company may be borrowing money from family members. Giving a family member a job simply because they are family (notwithstanding that they may not have the appropriate skills for a job) may well result in other employees becoming unhappy.
It may well be that capital value can be “shared” with family members, and they could also be paid dividends without them necessarily working in the business.
It is possible that a shareholders agreement could be considered which may set out the important decisions in respect of which shareholders (or a specific number of them) have to consent. Whilst this may be controllable for first generation, these agreements could become more problematic should the shareholding become more diverse (see comments below surrounding the transfer of shares to family members).
Laura Mortimer, B P Collins’ family partner: When bringing in any new shareholder into the business, it’s important to think about whether they should have a prenuptial or postnuptial agreement in place with their spouse (especially if they might become a shareholder too, or employee for tax efficiency). This can make it clear that their interest in the business is to be treated as non-marital.
How can a dynastic business prepare sensitively for deaths, legacy and handovers?
Holly McNeil, B P Collins, corporate and commercial associate: There needs to be an honest, open discussion on what will happen on death and this should ideally be documented, either in a shareholders agreement or contained within the company’s articles. For example, is the intention that shares held by family members can be transferred to their spouse or child or other blood relative or should the shares be first offered to the other shareholders? If shares can go to a spouse, then does that spouse have the right to transfer the shares outside of blood relatives? If you are doing this then the definition, in any constitutional document, of the people to whom the shares can be transferred needs to be considered very carefully taking into account blended families.
Is there an intention that holding shares will allow the holder of such shares to have a say in the day to day operations of the business? This should not necessarily be a given.
In terms of any “handover” (whether shares are transferred or family members are appointed as directors etc) it may difficult for the founder shareholder(s) to relinquish the control they may have had up to that time. Again, having an open discussion about the future (including on how decisions will be made going forward) will be beneficial.
It is also important, in considering any potential handover of the business, to seek advice on how to do this in the most tax efficient way.
Laura Mortimer, B P Collins’ family partner: Lastly, it’s important to realise that if any of the shareholders get divorced, the family court has far reaching powers to deal with their assets (including their shareholding in the company) to achieve financial fairness between the divorcing couple and meet their needs. As such, it’s important to think about putting in place prenuptial or postnuptial agreements that decide now how business assets are going to be treated on divorce, and how they can be ring fenced and protected.
What are some red flags for a potential clash and what advice is there for such owners?
Holly McNeil, B P Collins, corporate and commercial associate: The issues where agreement is difficult to reach depends on what input the family members may have. Are they directors who will have to agree on the direction of the business or is there a shareholders agreement which may require them to vote in favour (or against) certain actions? If that is the case (and the family do not find it easy to “get on” and compromise) then, whilst there is a lot to be said to having a culture which allows the challenging of decisions, the founder should consider whether it is really appropriate to place the business under this strain. Ultimately such disagreements could lead to one arm of the family being forced out by way of a court order or the company being liquidated by order of the court.
Laura Mortimer, B P Collins’ family partner: Also, if one of the owners of the business is getting divorced, in the absence of clear restrictions in shareholder agreements and contracts of employment, the family court can make their own assumptions about what value can be extracted from a business through borrowing against or selling off assets, and also about the sustainable income an owner can draw from the company. Business owners owe it to each other to think about what might happen in the event of divorce, and to put appropriate protections in place.
How does an owner weigh up an exit over succession?
Holly McNeil, B P Collins, corporate and commercial associate: An owner/founder will often believe that their family will want to run the business – however is this really the case. The owner should consider whether the family who may succeed them want to and have the skills to run the business. Would they be better served if the business was sold and money could be distributed to the family?
In reaching a decision the founder will need to understand the tax liabilities. The passing of shares on death in a family business will soon not be as straightforward from a tax point of view as is currently the case. Transferring shares under a will to family members (not spouses) could result in the family members getting not just the shares but the estate incurring liability for inheritance tax so the founder has to determine the quantum of the tax and what assets may be available to satisfy that tax liability.
How does a business owner or founder ensure their legacy stays intact when handing over?
Holly McNeil, B P Collins, corporate and commercial associate: This is very difficult. Can, or rather should, a founder try to limit the ability of future generations to change the way in which a business is carried on? Could this in fact be counter productive and could it restrict the ability of the business to be flexible and change direction in what is a very fast paced business world.
How easy is it to separate family relationships from business ones?
Holly McNeil, B P Collins, corporate and commercial associate: This comes back to considering whether the correct people are in place from a management point of view and separating the holding of shares from those people who run the business on a day to day basis. Unless there is a shareholders agreement in place (see above) the shareholders cause less of an issue than family members who are closely involved in the running of a business.
If a family member is not up to the job then they should not run the business and sometimes hard decisions have to be taken to save the wealth for the whole family. In addition, retaining such a person may result in other employees leaving.
It is however a very difficult decision for a founder to remove a son or daughter, as example, from a particular role – however the founder must look at the bigger picture and look to secure the business for all and not just one.
What if you wish to retain the family business amongst close family?
Holly McNeil, B P Collins, corporate and commercial associate: The decision as to who should be appointed to managerial positions should be based on capability and not relationship. If the intention is to ensure than some “relatives” are not to receive shares then the drafting of the articles of association (or shareholders agreement) will need to be very clear. It is possible that the articles (or shareholders agreement) may contain provisions that prevent shares from being transferred unless to a particular defined group. If shares are transferred to a family members spouse, then you can include provisions that on a divorce the shares must be transferred from the non blood relative (i.e. a spouse) back to the blood relative.
Laura Mortimer, B P Collins’ family partner: However, be warned that the family court can still make their own assumptions about whether those shares are effectively part of the marital ‘pot’ for division between the spouses.
Holly McNeil, B P Collins, corporate and commercial associate: If there is an intention that certain blood relatives should be excluded from being transferees of shares, then the matter becomes much more complicated. Whilst it could be possible for a founder to “exclude” such a person from the list of permitted transferees what happens when the founder dies and the people to whom such shares transfer do not agree with the founders views. One way that the founder may be able to “bind” the successors by embedding certain provisions in the articles (this makes it harder to change those provisions in the articles).
How do investors typically view family businesses?
Holly McNeil, B P Collins, corporate and commercial associate: An external investor may have a concern about investing in a company where it knows or suspects that all family members are not aligned and there is not a clear and specific way of remedying any disagreements.
The level of concern will depend on the level of protection an investor includes in its investment agreements.
An investor will want to know that the management team have been appointed on merit and not simply because of their connection to another person. If the investor has a means of ensuring that it can “control” the family shareholders then this will not prevent it from investing in a good company.
Many of the comments made concern the situation where a family member will be involved in the management of a business, rather than just holding shares. If the sole concern was the passing on of wealth, instead of the actual running of the business, then a business owner could consider the use of appropriate trusts and/or family investment companies, in appropriate circumstances. For further advice and information, please contact B P Collins’ corporate and commercial or family teams at enquiries@bpcollins.co.uk or call 01753 889995.
