News & Blog

Read the latest business news, blogs and thought leadership articles from our members, as well as updates on the Edinburgh Chamber of Commerce's work in the city.

News & Blog

Succession Planning for the Family Business

Posted: 5th July 2017

Despite the fact that the family business often makes up a significant portion of a family’s overall wealth, many successful family business owners do not plan effectively for the succession to their business often leading to uncertainty, additional tax, family conflict and sometimes the complete failure/sale of the business.

It is extremely common for family businesses to struggle as they pass through the generations (for a whole variety of reasons) and indeed statistics indicate that most family businesses do not make it past the third generation.

In our experience there is no magic to good succession planning other than (1) taking the time to make a plan (using your key advisors in an appropriate and complementary manner); (2) implementing the plan (through careful lifetime and post-death planning) and (3) communicating with relevant parties – communication is absolutely key when it comes to managing the expectations of both family members and colleagues.

There are multiple factors to consider and some business owners (particularly first generation owners who have built the business up from scratch) find the process overwhelming. Each business (along with each family) is unique making it difficult to establish a set of core principles. Assuming that the owner wishes to maintain the family business for successive generations, the following represents some factors worth considering and if appropriate potentially enshrining in a Family Constitution and/or Shareholders Agreement to protect the future of the business:

1. What makes the business successful currently and bearing that in mind, what are core values, structures and protocols that should be enshrined for the future.

2. Is there an obvious successor either within the family or within the current management team?
This will often depend on the age and stage of the family members and whether they currently work/intend to work in the business or indeed whether they have the requisite skills to drive the business forward. It is important to remember that for some businesses it may not be essential for ownership and control/management to coincide.

3. Consideration should be given to timing – should the plan be implemented at retirement, over a successive controlled period of time or on death.
The transfer of shares or the creation of different share classes requires careful consideration both from a tax and practical perspective. Shares in an unquoted trading company may be eligible for Entrepreneurs’ Relief (reducing the rate of capital gains tax to 10%) and Business Property Relief (reducing Inheritance Tax to nil). Both reliefs are extremely valuable and with careful planning and advice can be utilised to the family’s advantage. It is worth noting that the reliefs have strict criteria attached to them often meaning that careful monitoring is required to ensure that they are maintained.

4. Trusts can be a helpful mechanism to hold/transfer shares to/for the next generation while retaining an element of control. Care needs to be taken not to overcomplicate the family’s affairs and it is important that parties understand that trustees have separate duties which may not always align with the direction of the business.

5. If it is intended that shares will pass to one child (in preference to their siblings) are there sufficient assets outwith the interest in the business to redress the balance and if not, how will this be perceived by the other family members and affect their ongoing relationships? It is also important to bear in mind that legal rights arise in terms of Scots Law meaning that children (regardless of age) are entitled to a portion of a parent’s moveable estate (which includes shareholdings).

In addition to a Family Constitution there are certain basic building blocks which should always be in place – it is absolutely essential that a Will and a Power of Attorney should be prepared.

Business Comment

Business Comment is the Edinburgh Chamber of Commerce’s bi-monthly magazine. It provides insight on Edinburgh’s vibrant business community, with features on the city’s key sectors, interviews with leading figures and news on new business developments in the capital.
Read more here