In order to protect the continuity of a family enterprise for the benefit of future generations, there are three key areas that need to be addressed upon the business’ formation, namely family and corporate governance, ownership structuring, and succession planning.
Here, we'll explore the structural considerations and processes that all family-run businesses must adhere to promote long-term growth, security and longevity.
Governance Structures
There are important questions that must be answered at the outset of any new enterprise, such as ‘How will the business be run?’ ‘Who will be responsible for making the important decisions?’ and ‘Who within the family will have a say, and what kind of gravity will their opinion have?’ Having robust governance structures in place determines the boundaries for family member involvement and formalises the areas of responsibility.
There are two distinct areas to consider when it comes to governance – namely governance of the business, and governance within the family itself.
Family governance establishes a shared decision-making system based on a family's history, values, and purpose, drawing inspiration from corporate governance while prioritising communication over the day-to-day formalities. It enables structured discussions to take place on complex issues whilst facilitating family members' integration into the family and business network.
Regular family governance meetings promote communication, decision-making, and understanding of the family's narrative and vision, often incorporating educational aspects about unity, wealth expectations, and business involvement.
Equally, the formation of a Family Council acts as a liaison for family members outside the immediate business operation, ensuring diverse representation and involvement in the family's commercial interests.
Business governance, on the other hand, is pivotal in reducing internal conflicts, delineating authority and decision-making processes within the business. Depending on the business's size, governance may involve a board of directors overseeing direction and control, or an executive board managing day-to-day operations and strategy.
The ‘four-room’ model is recommended for clarity, dividing responsibilities among the owner’s room (board management and strategy), the boardroom (supervision and hiring), the management room (business strategy and operations), and the family room (shared goals and legacy).
This will only be effective, however, if there is a clear ownership and role structure in place which is representative of the business’ goals.
Ownership
Selecting the appropriate structure for a family business in the UK requires careful consideration of various factors including legal and tax implications, desired control levels, the extent of business involvement, and estate planning objectives.
Corporate structures, for example, can offer liability protection but require more in terms of compliance and organisational costs. However, for some family businesses, especially larger ones, the separation of management and ownership without compromising professional governance may be more beneficial.
Considering what is best for the continued growth of the business, and protecting the prospects of those invested in it, is essential in determining the most fitting business structure. There are numerous options available, but not all will suit the business’ needs.
Sole Ownership: Sole ownership is prevalent in the UK, especially among small businesses, due to its simplicity and low start-up costs. The main advantages include complete control over decision-making, ease of setup, and retaining after-tax profits. However, this business structure faces challenges such as a limited succession pool and the burden of unlimited personal liability, which may hinder funding opportunities due to perceived financial risk.
Partnerships: Starting a family business as a partnership, as defined by the Partnership Act 1980, involves individuals working together with the aim of making a profit. While establishing a partnership can occur unintentionally and without a formal agreement, it's crucial, especially in family businesses, to have clear terms outlined to avoid complications. A family business structured as a partnership typically limits ownership to actively involved family members, fostering resilience and innovation through diverse perspectives. However, this model can also introduce competitive tensions among family members vying for specific roles, underscoring the necessity for clear governance. To mitigate potential disputes and articulate the allocation of profits, losses, and decision-making processes, instituting a formal partnership agreement is advisable. Partners should be aware that they bear unlimited liability for the business's debts and obligations, similar to sole traders.
Limited Liability Partnerships (LLP): An LLP is a distinct legal entity offering its members liability limited to their investment and any personal guarantees. Unlike traditional partnerships, an LLP's structure requires adherence to an agreement detailing its operation, profit distribution, member responsibilities, and termination protocols. Members are taxed based on their income share from the LLP. However, an LLP entails more administrative tasks, including maintaining a members' register, preparing annual accounts, and public filing with Companies House, leading to higher administrative costs compared to traditional partnerships with fewer formalities.
A private company limited by shares or guarantee: In the UK, most private companies are limited by shares or guarantee, meaning they exist as separate legal entities. The limited by shares structure limits shareholder liability to the value of their shares and allows for the sale of shares to raise capital, whereas limited by guarantee doesn’t involve shares and instead the company is owned by guarantors (members) with limited liability. The latter is often more suitable for non-profit organisations and management companies. Changes to membership are made easier with a company limited by guarantee as no share transfers are required. These structures involve more administration, including filing annual accounts and tax returns, but offer tax benefits and protection of personal assets in case of insolvency.
Estate and Succession Planning
Without the necessary structure in place to determine what happens when the business owner departs or dies, all of the above may be rendered redundant, and the business may struggle to emerge intact from the ensuing chaos as family members scramble for control. This is why estate planning and succession planning are crucial to a family business’ long-term prospects. Having a structure and process in place for both is vital.
Succession planning in a family business focuses on ensuring the continuous management and operation of the business across generations, unlike estate planning which is mainly about transferring ownership. Both are necessary for the seamless transfer of roles and responsibilities to future generations in family businesses.
When numerous family members are competing for top ownership positions in a family business, succession becomes difficult. In addition, it is challenging for the following generation to assume leadership when there is no succession plan in place.
Businesses generally utilise succession planning as a means of streamlining the transition of ownership or leadership. It entails identifying the individuals who should be trained to take on new positions inside the business in order to accommodate future, inevitable, changes (such as death ore retirement).
Succession planning acts as an ongoing contingency plan that should be annually reviewed and updated according to company changes, and any comings or goings of family or senior staff members. It involves assessing leader skills, identifying replacement candidates, and developing their understanding of the business and its operations to ensure they can take over roles effectively. This process is significant for both large and small businesses, with the latter focusing on preparing the next generation for leadership.
The planning process requires considerable time and effort, with an emphasis on making sure that the right individuals with the appropriate future leadership potential are earmarked for succession, not just those who are oldest, or feel they have a familial right to take over. Its about considering what is best for the business, not satisfying egos, and if that means considering those who are not members of the family for senior roles, so be it. Remember, if the business thrives, the family will ultimately benefit in the long run.
Planning for succession should begin early enough to prevent unpleasant and impromptu talks or dramas because succession is a journey rather than a standalone event. Strategic planning and the ability to adjust to changing conditions are made possible by a continual dialogue – remove any nasty surprises, and family members will be less likely to become upset.
Conversely, estate planning is crucial for ensuring smooth ownership transferral. It involves creating a detailed transition plan that covers the regulation of ownership, asset distribution, and responsibilities for future generations.
While families may rely on their business governance frameworks to handle these matters, unforeseen life events can complicate situations, making formal shareholder agreements and estate planning essential.
These plans must consider a range of potential issues, including inheritance taxes, income distribution, financial treatment of non-contributing family members, spousal benefits, decision-making processes, crisis management, and liquidation scenarios. Addressing these uncomfortable topics early on is vital to avoid unexpected consequences and ensure business continuity across generations.
Should you require any advice or support on how best to preserve the legacy of your family business, please contact the specialist family business team at Buckles for a confidential, impartial consultation.
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