In some senses, the legacy of any business is a slightly nebulous concept, but the thing which tends to set family businesses apart from other businesses is the degree to which people are personally as well as financially and professionally invested in them.
This means that the way the business is set-up, managed and run on a day to day basis is much more likely to provide a reflection of the values of the family members who own that business, and it is the continuation and upholding of these values which makes up the on-going legacy.
In this article we’ll look at the issue of preserving the legacy of a family owned business when the time comes to sell the business or pass it on to a new generation.
What Is A ‘Legacy’?
In the context of a family business, a legacy might include any or all of the following:
The family history on which the creation of the business is based
The wider reputation of the family across society
The moral and ethical principles which guide the behaviour of the family members involved in the business
Charitable and philanthropic actions carried out by the family and the business in support of particular causes
In addition to the ethos and attitudes propounded by the family through and around the running of the business, the legacy of that business could involve material assets such as property, plant, stock and the goodwill of the customers. Protecting these assets is what preserving the legacy of a family business is all about.
In practical terms, there are steps which can be taken when dealing with the issue of preserving the legacy of a family business but the overarching principle of successful legacy preservation involves detailed succession planning.
Succession Planning
Choosing the right person or persons to take over a business upon retirement is the key element of any effective legacy plan, but it is often something which many businesses neglect to face up to.
The reasons for this might be as simple as a natural reluctance to consider the prospect of dying, becoming ill or retiring, particularly if doing so means discussing matters of this kind with close members of your family. But the truth is that failing to plan for succession could lead to conflict within the business and – perhaps even more tragically – the family itself.
In the simplest possible terms, examining the various options for succession and having a plan in place will mean that a change at the top of the business, whether planned or unexpected, is far less likely to lead to the kind of disruption which could badly damage the business.
The standard models considered when planning for succession include the following:
Passing to a family member: This is the option which is most likely to make it easy to maintain the ethos and ideals of the business, at the same time as establishing and entrenching wealth across the generations. Keeping the business in the family is also a highly effective means of maintaining the confidence of the wider outside world. A process of this kind is only likely to go smoothly, however, if clear lines of communication throughout the family have been maintained in the run-up to any hand-over, and the new arrangements are underpinned by carefully drafted legal documentation.
Selling the business to a co-owner or fellow employee: If the business operates under a shared ownership model then ownership could be transferred to a co-owner, while, if there is no shared-ownership, it could be sold to an existing member of the team. The advantage of this approach is that it will help to ease any concerns regarding the skill and experience of the person taking over. The process of selling to a co-owner will start with making a valuation of the stake which each of the owners holds. For businesses which are listed on the stock exchange the share price can be used as the basis for valuation, whereas for those which are privately held an appraisal will be needed to establish an agreed value. Once this agreed value has been reached, it can form the basis of negotiations between the two owners.
Selling the business to an external party: Interested parties you could consider selling your business to might include competitors or existing investors, and this option could be preferable if you’ve decided you want to walk away from the business completely. The valuation will need to be established in a manner which takes the ownership structure of the business into account, and once a price has been reached you can set about finding the right buyer. In terms of preserving legacy, this option requires a large degree of certainty regarding the approach which the new owners will take to running the business. The alternative to simply trusting the instincts and practices of any buyer is to have the values and ethos of the business clearly set out in the form of a document, drawn up with the agreement of all relevant parties (i.e. any other family members involved in the business). A document of this kind will not only be useful when it comes to setting out how you expect the business to be run in the future, it can also be a tool for preventing or minimising conflicts which might arise over the running of the business on a day to day basis prior to any sale or succession. However detailed a document of this kind is, however, it will not be binding on any future owners of the business once a sale has been completed. Nor can the kind of restrictive covenants which can be imposed on the seller of a business to prevent certain actions for a specified period of time be placed on the person buying your business. Put simply, once they’ve purchased the business they can run it as they see fit, and although certain structures in place (such as existing supply chains) might make radical departure from the status quo either practically difficult or economically un-viable, in the long term you are relinquishing control and influence over the business, and thus creating uncertainty regarding the business legacy.
Employee Ownership
For the reasons given above, selling to an external third-party might not appeal at all if business legacy sits at the forefront of your thinking when the time comes to retire, or if unexpected illness or death means that succession becomes an urgent consideration.
In the vast majority of cases a straightforward familial succession will be the process which does the most to ensure the legacy of a family-run business is preserved, but in some circumstances this won’t be possible, perhaps because the family member to whom the business would be left doesn’t have the requisite experience or skill-set at the time of the succession, or in some cases because they don’t actually want to take over completely.
In cases such as these an employee ownership model is far more likely to protect the legacy of the business, as it involves people who have often worked in the business for many years, are steeped in the culture of the business, and will be able to pass what they have learned about the business on to future employees.
Another advantage of the employee ownership model is that it boasts a degree of flexibility, enabling the owners in question to tailor the model they use in order to reflect the division of family and business they wish to have in place going forward.
The choices range from employees becoming minority shareholders in the business to having complete ownership:
Minority employee shareholders: In this model, the family retains the majority of ownership, with a sizeable minority being transferred over to the employees. The employees can purchase shares in the business on an individual basis, or the shares can be purchased by an employee trust which will hold them on behalf of multiple employees. The advantages of this model include the fact that it frees some capital from the business for the family without them having to completely relinquish control, and empowers the employees involved to feel that they have a genuine long term stake in the success of the business.
Minority family shareholders: This is the opposite of the above structure in that the family retains only a minority of shares in the business, with the majority being sold to employees directly, via a trust, or through a combination of both. In this way the family will still maintain a stake in the business – something which is important to many families – while taking more of the money available. Another advantage of this model is that if the family transfer more than 50% of their shares to an employee ownership trust they generally don’t have to pay capital gains tax on the sale, while the employees in question are entitled to an annual tax free bonus of up to – at the time of writing – £3,600.
Full employee ownership: here, the family divest themselves of all shares in the business, using the structures previously discussed. This approach offers the advantage of maximising the amount of money the family can extract from their business, at the same time as making it more likely than other models that the legacy of the business will be preserved. In order to maximise the influence which the family will continue to have over the business, some family members could continue to work in it, or be appointed in a role helping to govern any employee trust. At the same time, the constitutional documents of the trust – setting out the rules over how it will operate – can stipulate that any family trustees have a veto over decisions which might impact the legacy of the business negatively, such as relocation, a change of the company name or sale to a third party.
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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