Don’t let a stranger take over your family firm

Ring-fence your business from the effects of divorce, incapacity and more, urges Callum Kennedy

Family businesses remain vital to Scotland’s economy. Ranging from microbusinesses run from spare rooms to household names, they account for almost 70 per cent of small and mediumsized businesses in Scotland.

There is evidence family businesses outperform the FTSE All-share Index. But there are also more worrying statistics, such as the fact that only a third survive into the second generation. This is likely due to the fact only 13 per cent of family businesses in the UK admit to having a robust, documented, communicated succession plan in place.

Most conflicts and tensions arise from personal issues such as succession or relationship problems, and more fail for family reasons than business-related ones. Issues around succession planning, wills, powers of attorney and prenuptial agreements can be as important to sustained success as the corporate law side.

Put bluntly, without these arrangements in place, what happens in the family – from divorce to intestacy – could jeopardise the future of business. Or at least subject it to lengthy litigation and forensic accounting processes. Not only are these expensive, they can drain the energy of the business and create longlasting family disputes.

Probably the most critical issue to consider is succession planning. If someone dies without a will in Scotland (and it is estimated that more than six out of ten people do), their estate is administered according to the intestacy laws.

In practice, this means that rather than the business passing in a planned way from one sibling or generation to another, its future will be decided by the law. In some cases, this leads to very young children or distant relatives inheriting control of the business.

Making a will can avoid such problems, but when doing so, the personal and commercial elements should not be treated in isolation. The provisions of the will and the business’s articles of association or partnership agreements must align.

Other possible issues to consider include: Power of Attorney (POA), which helps ensure business as usual – from paying bills to signing contracts – if a business owner or partner cannot work as a result of serious illness or accident.

Poas are often viewed (wrongly) as relevant only to the elderly or infirm. In fact, they can be pivotal to the continuity of a business if a key person suffers a loss of capacity, either temporarily or permanently, and are relevant even to the youngest and fittest of business owners.

Prenuptial or cohabitation agreements: in family businesses, decisions around corporate structure, share issues and personnel are often based on commercial or tax reasons. In this planning, it is easy to overlook the consequences of relationship breakdowns for the business. Incorporating family law advice, as well as corporate and tax advice, in this planning can protect the future of the business. Prenuptial contracts or cohabitation agreements can ring-fence a family business from being included in divorce or separation settlements, thereby safeguarding its future.

In the midst of all the paperwork that faces business owners, it is understandable to want to limit the legal arrangements involved.

However, it may help to think of it this way. If you asked Scotland’s 60,000 family businesses whether they’d be happy to let a stranger take control of their future, they would probably send you packing. If you also told them the stranger might not consider their commercial activities, customers or marketplace when deciding on their future – well, their response might not be polite.

Yet the law in Scotland around intestacy, marriage settlements or incapacity means that, if certain events or misfortunes occur and family members don’t have wills, Poas or prenups or cohabitation agreements in place, the future of the business could be left to lawyers and courts.

It’s far better to plan this future yourself by putting in place your own provisions for succession, attorneys and relationship ups and downs. Callum Kennedy is Partner and Head of Private Client services, Lindsays