With almost 300,000 family businesses representing a staggering 83.9% of private businesses in Scotland, it is understandable that they are seen as the bedrock of the country’s growth. As major employers, families rely upon these entities for their living, and the income generated is ploughed directly back into our economy. Given the top 100 Scottish Family Firms generate circa £22.6 billion for the economy every year and employ over 874,000 people, Scottish family businesses can safely be described as a crucial source of growth and success for the Scottish economy across all sectors, including retail, food and drink, property and construction sectors.
You may ask, what makes family businesses so unique? Although management dynamics play a role as they navigate relationships between the owners, family and business, the largest difference is the socio-emotional wealth that many of them have. These are the non-financial reasons for their existence.
Family businesses are likely to place their priorities within the family. When asked about long-term goals in the PwC 10th Global Family Business Survey 2021 (PwC, 2021a), continuity for future generations appeared to be particularly important. Findings further indicated from the family firms that took part in the survey, that 82% of those said protecting the business as the most important family asset was a key aim. In addition, 65% reported that they wanted businesses to remain in the family, and 64% wanted to ensure a legacy was created. Other common reasons included the provision of employment for the local community, raising funds to support a charity or philanthropic activities.
With continuity for future generations being one of the most prominent aims, it is important to think about how family businesses can plan for their future. The earlier you expose the next generation to the family business, the better, because it allows them to make an informed decision as to whether they want to get involved in that family business in the future. Quite often, the senior gen is surprised at the emotional attachment that the next gen has to the family business. They remember having family gatherings , pushing grandad round the factory in his wheelchair etc. Indeed, covid prompted many next gens to return to their family homes for lockdown, and as a result, got involved in the family business perhaps earlier than they may have done so.
There tends to be a few triggers, that prompt family businesses to look for help and put formal governance in place. There are of course the usual prompts - death, divorce, the lack of a successor from the family to take over the family business. These are all important, and the most successful family businesses have formal governance in place before the family is put into a state of shock and emotion, which is always a tough environment in which to operate and make important decisions.
Often a well organised family business may reach out for advice, when they have noticed that the family values instilled in their family, are not mirrored in the future partners of their kids. They see their children being influenced by these “outsiders”, to make decisions which would normally not be taken and so fail to align with their own family values. This circumstance is often the catalyst for family owners to start introducing governance that will protect the family business and its future from these outside influences. These may be shareholder agreements, who and when can become an owner of a family business, perhaps putting in place pre-nups or post-nups, or policies on employing family members. These are all used as means of protecting for the future and safeguarding against some of the more common triggers highlighted.
Safeguarding – Generations – Prenups/Post nups.
There is a general rise in those seeking advice about the protective measures which can be put in place to safeguard family business interests from a claim on separation or divorce, and death, particularly when a second marriage is involved.
While Scots law provides a decree of protection to assets acquired before marriage, and inherited assets or those gifted to a party from a third party (gifts between spouses are matrimonial property) during the marriage, that is only the case if that gift or pre-marital asset remains in the same form. In other words, if assets are sold or realised, even for sound tax planning reasons, one could have inadvertently created matrimonial property where a claim can be made. The asset which could be considered matrimonial would be the value of that person’s shareholding at the date of separation, and possibly any directors loan account. With a partnership, it would be the value in their capital account and/or any retained profit. A significant point.
Business interests by their very nature rarely remain static, they change over time. Shareholdings change hands. Business entities are restructured. It would be heart breaking for the family if one family member’s separation and divorce brought the business to its knees.
A carefully worded pre or post nuptial Agreement can provide vital protection for any such transactions. With the right knowledge of a family business, an Agreement could be crafted to ensure it supports and protects the family business succession plans, so vital for a business’s successful continuance. Importantly, these agreements are binding, as long as the parties are consenting adults, and the provisions of the Agreement are lawful. It is recommended however that parties secure independent legal advice as far in advance of the wedding as possible before entering their pre-nuptial Agreement.
It is also important to note that prenups have another important benefit by protecting a business from the untimely death of a family member. For so long as a couple are married, even separated, and until either a Minute of Agreement in full and final settlement is entered into or they divorce, it is possible for a surviving spouse to claim upon the moveable estate of the deceased. Depending on whether there are children, the claim would be to ½ or 1/3 of the net moveable estate. A pre or post nuptial Agreement, can include provision to discharge the right to make this kind of claim.
If this inclusion is proven to create a difficulty and families truly view the protection of their business as the most important family asset, then careful succession planning measures are vital when safeguarding the family business for generations to come.
About the Authors - This article was written by Kirsty Ross, a Director at Turcan Connell and her colleague, Lindsey Ogilvie who is a partner in the firm. Find out more about the work they do to support family businesses by visiting their website at www.turcanconnell.com
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