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15 December 2014

Family planning – the business way

Statistics* show that there are now around 2.42 million first generation family-owned businesses in the UK – the highest number since 2008. Each year, they contribute £180 billion to the economy, a figure that is predicted to rise by 21% to reach £218bn over the next four years.

For some individuals, the vision will be to create a family firm that will last for generations, while others will simply wish to achieve success and sell the business to fund future projects or life dreams. Whichever is your goal, Simon Deans, partner in the corporate and commercial practice, has some timely words of advice.

When you start a business, the focus tends to be on the immediate tasks in hand – funding and product development, customer service, employees and premises. Exit planning is likely to be a long way down the list yet, at a time of growing acquisition activity, an attractive offer can create unexpected divisions between business founders and stakeholders, including management and investors.

While most company founders believe they share objectives, they should ask themselves what would happen if an offer of £5 million was made for the business. How would this fit with any long-term objectives? Is it the intention to pass the company to the next generation? Would all the participants be aligned on the outcome?

These questions underline the importance of discussing issues early on so the business owners discover any divergence in long term-goals.

The future outcome is just one of many areas which need careful consideration. For example, when setting up the company structure many husband and wife partnerships will each award themselves shares.

It’s something that can deliver tax benefits but it is also a move which can be fraught with disaster if the couple fall out or get divorced, with huge implications for the business, its employees and its customers.

Employing family members can also be a challenge. While it may seem an obvious choice to offer a job to a newly-graduated offspring or an unemployed sibling, what happens if errors are made or the business is sold?

Just because they are related, it doesn’t mean family members won’t feel aggrieved at the potential loss of a future career, especially if they are watching a parent walk off with a significant sum in their pocket.

Family or not, they may demand to be treated like any other employee or expect a share of the proceeds and if the situation isn’t handled correctly then the wider relationship could be damaged and any sale compromised.

Ongoing dialogue between stakeholders and legal advisers is essential to ensure potential issues are acknowledged and dealt with early on to head off potential problems.

After all, a business owner who decides to announce his impending retirement doesn’t want to discover when it’s too late that no-one else in the family wants to take over.

When considering an exit plan, it’s important to step away from day-to-day operations and ensure that all issues such as refinancing activity, share buy-back or ventures into new markets have been correctly managed and completed.  An experienced lawyer will help

you have open and honest discussions with all concerned on a regular basis to ensure an action plan is in place and any issues are addressed.

This is important because any potential buyers will always undertake rigorous due diligence prior to acquisition. Any problems could not only delay the sale but result in a drop in price or, in the worst case, a lost deal.

With the economy on the rise, business acquisition activity is picking up significantly and even if selling isn’t in your plan today – ensuring everything is in order might just make the difference between maximising the value of the business – and losing a life-changing opportunity.

For corporate legal advice contact a member of our team on 01753 279022 or email commercial@bpcollins.co.uk

*Statistics from a report by Barclays Business and the Centre for Economics and Business Research

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