Family businesses: why trust alone is not a succession plan

Family-owned businesses are a cornerstone of the UK economy, making a significant contribution to employment, innovation and long-term economic growth. While family businesses are particularly prevalent within the micro, small and medium-sized enterprise sector, a substantial number also operate at a much larger scale, employing more than 250 people and contributing significantly to regional and national economies.

Effective succession planning is essential not only to protect individual family legacies, but also to preserve the stability, growth and resilience of a sector that remains fundamental to the UK’s economic success.

Yet, despite the importance of ensuring a smooth transition between generations, succession planning is often one of the most challenging conversations for business-owning families. Few phrases cause greater concern than: “We don’t need anything in writing, we’re family.” While mutual trust is undoubtedly a strength and one reason so many family businesses are resilient during periods of economic uncertainty, experience consistently demonstrates that it’s not a substitute for robust governance and succession planning.

Even within the most harmonious families, arrangements that seem clear during a founder’s lifetime can become the source of costly and emotionally draining disputes following death, retirement or incapacity.

Recent case law serves as a powerful reminder of the importance of documenting intentions and regularly reviewing succession plans as both the family and the business evolve.

A reminder from Lane v Lane and informal succession planning

In Lane v Lane, a father and son each owned 40% of a family construction company, with their respective wives holding 10% each. During discussions with the company’s accountant, the family agreed that, on the death of either the father or son, their shares would pass to the survivor. Although advisers suggested documenting these arrangements through a shareholders’ agreement, the family relied on mutual trust instead.

Following the father’s death, a dispute arose between his widow and son over ownership of the shares. The widow argued that the shares should pass to her under the company’s constitutional and testamentary arrangements, while the son relied on the earlier oral agreement.

Despite the lack of contemporaneous documentation, the court upheld the oral agreement and found that it created a legally binding contract. Alternatively, the son’s claim would have succeeded on the basis of proprietary estoppel.

The case highlights the importance of formalising succession arrangements through appropriate legal documentation, including bespoke articles of association, shareholders’ agreements and family governance structures. It also serves as a reminder that standard model articles are rarely sufficient for family-owned businesses.

Family expectations in Winter v Winter

The Court of Appeal’s decision in Winter v Winter concerned a successful farming business operated by three brothers. For many years, the brothers had been given assurances that the family business would ultimately pass to them equally. Relying on those assurances, they devoted their working lives to the business and shaped their careers around those expectations.

Following a deterioration in family relationships, the father changed his will to leave his business interests to only one son. Two of the brothers subsequently brought claims based on proprietary estoppel.

The Court of Appeal upheld the earlier decision in their favour, recognising that dedicating a lifetime to a family business in reliance on promises of future inheritance can amount to sufficient detriment, even where the individuals concerned later achieve financial success.

The case illustrates the dangers of allowing longstanding family expectations to develop without ensuring they remain aligned with formal succession arrangements. While no governance structure can eliminate disputes entirely, family charters and regular succession discussions can provide a framework for managing expectations, reviewing plans and addressing disagreements before they escalate.

Why communication is key in Armstrong v Armstrong

A similar theme emerged in Armstrong v Armstrong, another farming family dispute concerning promises about future inheritance. The court upheld a proprietary estoppel claim after finding that a son had relied on assurances regarding succession over many years while devoting his working life to the family farm.

Like Lane and Winter, the case demonstrates how informal promises, changing family dynamics and inadequate documentation can create fertile ground for conflict.

How we can help

The common thread running through these cases is a lack of clear communication, documented decision-making and regular discussions about the future of the business.

Succession planning should not be viewed as a one-off exercise. It’s an ongoing process that should evolve alongside the family, the business and changing circumstances.

Seeking advice at an early stage enables families to put in place governance structures that support both business continuity and family relationships. By clearly documenting intentions and ensuring that corporate governance arrangements remain aligned with personal succession planning, business owners can reduce the risk of future disputes and safeguard their legacy for generations to come.

Our Private Client team has extensive experience advising family businesses on the legal, commercial and personal challenges that arise throughout the business lifecycle. We work closely with families to develop practical succession strategies, implement effective governance frameworks and navigate complex transitions, helping businesses prosper across generations while maintaining family harmony.