A dispute lawyer's guide to succession planning for family businesses

Plan for (and review following) life events

Frequently, families do not take a proactive approach. I have seen families instead consider succession planning only when there is a trigger event, such as the founder losing capacity or dying. 

Succession decisions being forced on the business often cause knee-jerk reactions, which can breed arguments. View business succession planning as part of broader family wealth planning.  By 'life events', I mean births, deaths, marriages, divorces, incapacity, and relocations.  Think not just about wills and will trusts, but also LPAs, lifetime trusts and carefully crafted letters of wishes.  

The existence of a family business is also a great way to introduce the subject of pre and post nuptial agreements (which by their nature emphasise certainty and financial transparency – both of which are good for family business continuity).  You can also make use of the articles of association and shareholders' agreements.

I have recently worked with a family business in which there was no appropriate mechanism to deal with deadlock.  Frustration / uncertainty creates conflict.  There needs to be a clear, fair and impartial framework / process.  This can include for example, a code of conduct, remuneration committees etc. 

Businesses that can adapt as families grow and change are likely to be the most successful.  So regular reviews should be put in place.

Equity vs equality

Sarah Aughwane and I have written about the fact that twice as many business owners plan to pass their companies on to their sons over their daughters.  

Where inequality is driven by discriminatory and outdated views, discord can follow, and the courts are increasingly willing to step in.  It is important to find out whether your family actually want to be involved in the business and to what degree.  

I often work with families where there is a perceived favourite who either (i) goes on to run the business, or (ii) is given the freedom to chart their own course outside of the business.  The bitterness / 'grass is greener' mentality almost inevitably generates disputes.

Meet with family members and discuss their individual aspirations for involvement in the business.  One individual may want to lead the business, another may want to be 'on the ground', and another may want to explore opportunities outside of the business.  As well as identifying who actually wants to participate, it is also important to understand the strengths, weaknesses and interests of family members and deploy them in the best way possible.

Keeping the business in the family is not the only option.  You could transfer to a third party as part of your succession plan, or sell parts of the business to create liquidity and a level playing field.  For example, Patagonia founder Yvon Chouinard, who transformed his love of rock climbing into one of the world's most successful sportswear brands, gave the company to a uniquely structured charitable trust.

It is, however, not always possible to achieve equality where there is a family business.  Sometimes there is a good reason to depart from equality, most commonly where there is a blended family or estrangement. Aim for equity rather than equality.  Succession planning that is fair is difficult to challenge.  But who is the judge of what is rational?  What is reasonable to one person may not be to another.

For many family businesses, equality may be the answer to avoiding disputes.  If that is not appropriate in your circumstances, advice is critical.  For example, I have stress tested family business succession planning and identified clear lines of attack, which allowed weaknesses to be rectified in advance of potential problems arising.

Be open and transparent:

With your family

The clear theme throughout is openness and transparency.  I have seen, particularly in the case concerning the tyre wholesale business, that secrecy can breed resentment and suspicion.

In addition (and particularly relevant to family farms), uncertain and undocumented promises can damage relationships and lead to costly and long-running litigation. Talk to your family about what you propose.  Encourage an open dialogue and let them ask questions.  Frankness in the process will help build relationships between key stakeholders to ensure a smooth transition.

With your lawyer

Even if you have an inkling that there may be trouble ahead, it can be tempting to bury your head in the sand.  It is always worth telling your lawyer if you think that there may be conflict.  As explained above, there will likely be steps available to mitigate any possible friction.

With other professionals

There is a shadow side of family businesses, which my colleague Matthew Riches-Lenaghan (a registered psychiatrist) has commented on.

There is a known phenomenon within family businesses where the founder can exhibit personality traits that make them successful (for example focus, obsession, risk taking, self-confidence, work ethic etc.)  Those personality traits can impact their spouse, children and grandchildren, potentially cultivating dysregulated family dynamics and family disputes.

It is no coincidence, for example, that higher socioeconomic couples and first generational wealth makers can suffer higher rates of divorce.  Similarly, children and grandchildren of the founder can be more prone to negative conditions / emotionally unstable features.

Recognising these features in the family dynamic and being prepared for the challenges they present will improve outcomes for the family business and reduce family disputes.  That may involve, from a lawyer's perspective, recognising when family therapy referrals may be necessary to ensure that succession planning can proceed effectively.

Having grown up around my family's business, and now advising families on the disputes that can arise when succession goes wrong, I have come to appreciate that every family business has a unique story. The challenge is ensuring that story can continue beyond its founder.

In my experience, the families who navigate succession most successfully are those who embrace planning as an ongoing process rather than a one-off event. They recognise that conversations about the future may be uncomfortable, but are far less painful than disputes after the fact.

At Withers, we help families have those conversations, identify potential risks and build comprehensive succession plans to make sure that when the time comes the transition will be a smooth one. We can also help founders, family members and other key stakeholders review their personal positions, ensuring their wishes, concerns and objectives are properly understood and reflected in the wider succession strategy.