The long-term goal for most business owners is to see their company grow and thrive long after they are gone – but failing to plan for the next generation can create unwelcome challenges to a smooth transition.
For family run-businesses, without proper succession planning, inter-generational tensions and family feuds can be a real risk. Emily Prout and Georgia Wookey from the Thrings Private Wealth Disputes team, looks at a hypothetical example of where it can go wrong.
Picture the scene…
Chris, a hard-working carpenter, starts his working life as a sole trader, grafting hard and building a good reputation as he eventually turns a profit. Over time, his business operations move into other areas, and he incorporates his business into a limited company with a small local workforce.
His personal life gets busier too with a marriage, three children and, sometime later, a divorce. He later meets a new partner who moves into the family home.
His two eldest children join the business, and Chris joins them as directors and shareholders. They help the business diversify and grow into other areas, and the family wealth is invested back into the company and its assets, including the homes of Chris and his wider family.
Matters take a turn for the worst when Chris is in an accident. Following a period of incapacity (which causes problems for the running of the family business, as he is unable to carry out his role as director), the family suffers heartache when Chris dies – having not made a Will.
The challenge ahead
As Chris’ death was reasonably sudden, there had been no discussions about the future of the business with his co-directors or family. Under these circumstances, Chris’ estate would be shared equally by his three children, but his unmarried dependent partner receives nothing under the law.
A far from simple task now sits with his Administrators in dealing with his estate. Not only do they need to establish which of his assets are personal and which belong to the business, but also how those assets are to be realised and account for any inheritance tax. This would involve discussions with the surviving directors and a review of the Company’s constitution documents.
To complicate things further, Chris’ unmarried partner, worried about her future security, decides to bring a claim for reasonable financial provision from his estate. The third child also feels they are entitled to some of the company assets upon Chris’ death, despite the fact they belong to the company.
Meanwhile, the surviving directors of the company are trying to keep the business running but are juggling the need for Chris’ interests in the company to be realised as part of the estate administration – issues such as buying/selling his shares are causing the company concern alongside the day-to-day running pressures.
What sadly follows is a difficult estate administration, with a claim for financial provision against the estate from his partner, a tricky family negotiation about the future of the business and how best to provide for all family members, as well as the splitting of business and personal interests. Worst of all, there is significant heartache and cost for all involved.
Avoiding the heartache
Whilst succession in family businesses can be tricky, they are often made worst by failure to plan ahead. Chris and his family could have avoided the strain on their relationships by simply taking some important steps, such as:
- Lasting Powers of Attorney: Putting in place a Business Lasting Power of Attorney, and a personal Power of Attorney – this allows decisions to be made about assets in the event you lose capacity during lifetime. Whilst many people are aware of personal Powers of Attorney, Business Powers of Attorney should also be considered, as often a business will not want a personal Attorney making decisions on behalf of a company director who loses capacity.
- Business structures: Consider the most appropriate legal structure for your business, and that the necessary paperwork is drawn up to deal with things like Shareholder’s rights, rights of pre-emption and what happens in the event of a business-owner’s death.
- Separation of assets: Try not to mingle business and personal assets, but most of all know what assets you hold personally and what assets belong to the business and record this via your accounting processes.
- Communicate your wishes: Talk to your family members about your wishes with the succession of the business, both on retirement, should you lose your capacity, and also in the event of your death. These sorts of conversations should not be a taboo and often help enormously to manage familial expectations and reduce any surprises after you have passed away – a trusted legal advisor can help facilitate these discussions if needed.
- Prepare a Will: This vital document addresses your business and personal assets separately and via which you can consider all members of your family who may feel they have an entitlement or financial dependency on you. A well thought out Will can also avoid post-death claims by disgruntled or unprovided for family members.
Whether you are facing conflict over an inheritance or have concerns over someone’s capacity, Thrings’ Private Wealth Disputes lawyers provide expert guidance to protect your interests. By offering practical, clear and compassionate advice on matters related to contentious Wills and Probate, the team help you navigate these sensitive issues with confidence and security. For more information or to discuss your estate planning needs, get in contact today.
