Succession Planning for Families With Businesses
Estate planning is a difficult subject for many families, often laden with emotional challenges and issues of communication. When it comes to planning succession in a family business, these same issues are magnified.
Experienced private wealth lawyer Sangeeta Rabadia discusses the subject of succession planning in family-run businesses in this article, delving into the unique challenges it presents and how a skilled lawyer may overcome them.
What are the key stages of succession planning for a family-owned business?
It is always important to consider succession planning at all times, irrespective of where the operational and management lifespan of the business is. It will of course be a hot topic and at the top of the list when there are certain things happening in the business or family. For the business this may be expansion, more family members joining or when the elder generation decides to take a step back. The implications of life events such as births, deaths and even marriages are all something to think about for family businesses.
What are the important considerations to take into account during this process?
In order for a family to successfully run a business without major issues, it is always important to plan and prepare. It is never too early to discuss governance of a family business and it is often a conversation that I have with clients when their business is in its infancy.
Having good governance documents in place from the onset will encourage open and honest discussions. It will also ensure that the family know how they fit in and have a mechanism to air any matters of concern. Governing documents can be regularly reviewed and amended to reflect the progress of the business and growth of the family’s involvement.
It is very easy to get held up in the actual running of the business and to ignore difficult and often emotive conversations. The following questions may be hard for a lot of members to consider, but the key to a successful family enterprise is to tackle these matters head on and have the difficult but necessary conversations.
- When will the patriarch retire?
- What will retirement look like? Will they retain a share of the ownership?
- How will remuneration for various active members be decided?
- How do you decide who becomes a senior leader such as the CEO in the organisation?
- Will non-working family members have a stake in the ownership? If so, how will this work? Will they have any decision-making powers?
- What happens if family members have an issue outside of the family business? What impact will that have on their ability to work together?
Having a decent infrastructure for the management of the family within the business will make it much easier to prepare for succession planning. Then one can turn their hand to more practical considerations, such as how to practically transfer control or shares within a business that is efficient and tax effective.
The tax implications often play a key role in deciding upon succession plans. Having a good governing protocol means that is likely that tax considerations have already been factored in and therefore the impact is not as significant as it could be.
In order for a family to successfully run a business without major issues, it is always important to plan and prepare.
In your experience of advising on succession for families with businesses, what are the most common issues that arise?
A family-owned business will be very much like any other business when it comes to the operational aspects. The nuisance is that family dynamics and politics often drive and even dictate the direction of a business.
The Institute of Family Business suggests that over 87% of the UK’s businesses are family-owned but less than 45% have any sort of succession planning in place.
Addressing difficult questions as above will mean that tragedies such as the Yung Kee family are prevented. When the founder of this roast goose restaurant company died, his two sons disagreed on almost everything and unfortunately ended up in court. The company was wound up and as you can guess, there is now a huge divide in the family. There was absolutely no succession planning in this case and the implications were dire.
Often, personal succession planning and its impact on the family business get overlooked. When you are drawing up your will or thinking about whom to award a power of attorney to, it will be important to ensure that your stake in the family business is yours to gift as you want. Special clauses within shareholders’ agreements may direct how your shares are to be dealt with, thus preventing the gift in your will from being realised.
Also, it may be perfectly fine for your spouse to have a power of attorney over your personal assets, but a poorly drafted power of attorney may inadvertently give attorney rights over your business role too, something that may be completely inappropriate.
The marriage of a family member with an ownership stake is also one of those conversations that clients shy away from. In the unfortunate event of a divorce, the starting point of a division of assets in England and Wales is 50:50. This would include your stake in the family business. You and other stake holders are unlikely to want your ex-spouse to retain an interest in the business. Thus, without proper protections such as a pre-nuptial agreement, matters could become very messy.
Quite often, clients will come to me and declare steps that they have already taken to exit the business or to bring someone into the fold. Unfortunately, on most of these occasions, their actions have given rise to big tax bills which cannot then be reversed, or they have missed great tax planning opportunities which mean a large tax bill is to be expected in due course.
There can also be a difference of opinion between generations. The elder generations often find it difficult to give up the day-to-day management of a business they gave so much to. Alternatively (or in addition), they may not take notice of the entrepreneurship of the next generation.
How can these best be planned for and overcome?
To put it simply, early preparation and having a suite of good governing documents are key. These are the foundation to fostering a culture that is acceptable to all. It is always important to review the documents regularly and ensure that they remain fit for purpose.
Generational cooperation is also important. The patriarchs may have set up the business, but in order for it to succeed beyond them, there needs to be an acceptance of the next generation being allowed to contribute to the growth, expansion and direction of the business. As matters currently stand, family businesses rarely make it past the 2nd or 3rd generation.
Get advice – the benefit of receiving sound advice from specialist advisors cannot be stressed enough. You will no doubt be great at what you do, but your advisors will ensure that you achieve your goals efficiently and without undue disruption to the business.
Can you share anything about your past experience in advising families on business and succession matters?
Ignorance is not bliss and it is never the right time to have those difficult conversations.
The family business cannot be considered in isolation to other family wealth and succession plans.
Successful succession plans are always carefully thought through, considered and reviewed regularly.
For lawyers less experienced in family law or estate planning, what would your primary advice be for succession planning concerning family businesses?
Advising family businesses on their succession needs is a very niche area of law and my advice would always be to get advice from someone who really understands the area well. It is not necessary for one person to do it all; I often work with a number of specialist advisors to ensure that the family business receives holistic advice.
As matters currently stand, family businesses rarely make it past the 2nd or 3rd generation.
The key is to recognise and appreciate the need for effective planning. Quite often, business owners will not know that they need to think about succession planning, so they will not take active steps to deal with it. Any advisor who works with a family business should be incorporating succession planning into the advice and the work they do. It may be something as simple as signposting them to the right people, or it could mean entrenching themselves with other advisors to develop a suitable solution for the business.
Each family and each business are unique and no one structure or strategy is going to work for everyone.
About Sangeeta Rabadia
Please tell us more about your journey into law and your career to date.
Law was not my initial career choice. However, I developed a deep interest for it during my university days and decided to complete the Graduate Diploma in Law. I began my legal career as a paralegal working in a small firm, which was fantastic experience as I was exposed to so many different areas of law. I supported clients with legal needs that often required deep understanding of intricate legal concepts.
When I qualified, I was promoted to partner very early on in my career and have always enjoyed helping clients achieve their goals whilst navigating very complex and multifaceted legal issues. I became passionate about private wealth; I really enjoy helping people find resolutions for matters that can seem very daunting, and with my multidimensional background I am able to advise on practical and ‘outside of the box’ options for clients.
I have always been vocal about how important it is for people to be educated in matters such as succession planning and therefore relish my speaking engagements at seminars and workshops.
My specialism also enables me to support a number of charitable organisations with their legal needs. I am currently a school governor for an all-girls high school and always enjoy talking about how I was able to achieve what I have from a humble background.
I am also a full member of the Society of Trust and Estate Practitioners, where I sit as Deputy Chair on their Membership Panel.
How did you come to specialise in wealth and estate planning matters?
Strangely, equity and trust law were not on my list of favourite subjects at law school. However, in practice, I became fascinated with it. I first interacted with trust law in practice whilst working on property disputes. As I became more and more accustomed to trust law, I advised on estate and trust disputes and helped clients resolve the unfortunate circumstances they found themselves in.
Clients find my knowledge of dispute resolution is extremely valuable as I am uniquely placed to assist clients with putting in place structures and procedures to ensure that disputes do not arise. The ability to apply intricate legal concepts to achieve client goals is very thrilling.
Do you have any plans for your career development in the latter half of 2023 that you can share?
It is a really exciting time at Spencer West; the firm has achieved so much in such a short space of time and has ambitions to keep going full steam ahead. Colleagues and I are currently developing some exciting plans to provide clients with more services, as well as more opportunities to better access the advice they need.
Sangeeta Rabadia, Partner
Longbow House, 20 Chiswell Street, London EC1Y 4TW, UK
Tel: +44 02079 258080 | +44 07713 440737
Fax: +44 02076 812600
Sangeeta Rabadia is a private wealth lawyer with many years of experience in the legal industry. She advises individuals and families across generations on wealth, wills and succession planning, as well as disputes regarding trust and estate matters. Her expertise includes the use of trusts, companies and other estate planning vehicles to protect wealth from unexpected events such as incapacity and from claims from third parties, and to manage domestic and international tax concerns. She also provides succession planning advice to families with businesses, land and property that they wish to pass through the family line, including specialist wills and lasting powers of attorney.
Spencer West is an award-winning full-service international law firm advising businesses and individuals across the UK and globally, with core values of collaboration, entrepreneurship and excellence. The firm’s experienced lawyers are recognised experts in their field and its international presence and global outlook enables its lawyers to advise on corporate, commercial, disputes and private wealth matters across multiple jurisdictions.