Succession planning is crucial for family firms
◆ Most businesses in Scotland are family affairs, but what happens if there’s no one to take over, asks Andrew Forsyth
There are 280,000 family businesses in Scotland, representing around 85 per cent of all Scottish businesses. Many are well established, with a strong heritage, so what happens if there’s nobody to take over? It’s important to prepare for a death, accident, sale, or retirement well in advance. Nobody knows what’s round the corner, and succession planning is rarely straightforward, so a clear plan is crucial.
Often an entrepreneur started the business many years previously, and it may be a second or third generation that can’t continue trading on existing terms. Whatever the scenario, one of the biggest hurdles is lack of strategic planning.
It can take several years to plan for a sale, so it’s rarely too early to get organised. Tidying up loose ends, cleaning the balance sheet, checking statutory requirements and ensuring good governance is vital to make a transfer straightforward. It also avoids last-minute stress and potential price chipping in the event of a sale.
Transferring shares is particularly challenging, whether to the next generation, or third parties. I’ve seen various scenarios – the common aim is protecting loss of value, whether that be via tax leakage, commercial issues, change of management or unexpected socio-economic factors.
Where a family wants to retain the business, but no longer manage it, a new management team, suitably rewarded for its efforts, could solve the problem.
A phantom share scheme, as part of this solution, can be an effective tool. It provides the new team, along with family members, with an equivalent annual dividend, but can also provide a capital sum as an equity stake on retirement. This enables new executives to join, ensuring the business retains the equity within the family, with no tax leakage, preserving value and enabling future generations to manage the asset.
In the US the concept of the “Family Office” is popular. This approach considers all family wealth and owned businesses as one financial entity, possibly under one holding company. This means wealth generated can be re-distributed across the portfolio, de-risking less profitable areas.
In the UK, we think of our wealth as stemming from the family trading business, and if there are several businesses, these are often treated as separate entities. I like to challenge this, applying the US approach above. This may require restructuring the company or group to suit emerging circumstances, or it may be a virtual concept, involving no physical changes to the business structure, but simply a change in mindset of how the family views its collective wealth.
In this scenario, the main trading business plays a huge part, but the family, with its diverse needs and objectives, is considered a separate entity. Thinking outside the box in terms of family needs, wealth protection and diversification of assets can lead to a completely fresh approach to the traditional view of the family company, which historically provided for everyone until it could no longer do so, often through natural circumstances, rather than lack of desire to continue.