Is your business a legacy or a millstone?

23rd October 2020

For many family business owners, a key factor in a wide range of decision-making is whether they perceive their business to be an asset worth preserving for future generations, or a headache they would sooner not pass on. This emotional push or pull can be incredibly powerful.

I have witnessed a number of entrepreneurs dissuade their children from joining the family firm. Often this is on a “not now” basis, with parents keen for the next generation to earn their stripes elsewhere first; but sometimes it is a clear “not ever”.

Once our entrepreneur has reached this crossroads, their attitude towards their business can change dramatically.

The realisation that the business may not pass from one generation to the next can see a subtle shift of focus, from growth and expansion to protection and ring-fencing. Whilst understandable, the desire to guard the nest egg can lead to caution. A reluctance to expend capital can – at worst – stifle an otherwise healthy business and can ultimately undermine the value our entrepreneur is seeking to protect.

Conversely, where there is an expectation that the business will pass to future generations, the present owner-managers are frequently prepared to invest for the longer term, even if they may not (directly) reap the rewards. This is especially the case when it comes to investment in tangibles, such as property.

Of course, the answers to the “what next?” questions inevitably necessitate a degree of planning.

If children are joining the business, now or at some future point, will they take equity? How will decisions be taken, if and for so long as there are multiple generations in the business? Who (if anyone) calls the shots? How and when will the founders retire?

These sorts of issues will need to be considered and it is wise for them to be documented (which is frequently done by way of shareholders’ agreement).

What if not all siblings will be involved? Parents will want to make sure their wills make adequate provision for all children – often by specifically allocating business and personal assets.

If the business is not going to be passed on, how can the value be realised? Trade sales tend to be attractive, but timing is crucial – parents will often want (or need) to preserve income for a period before they receive a capital sum, but if a sale is left too late and the business has suffered from under-investment, the value can be diminished.

Business owners are sometimes attracted to the idea of separating the trade from the property, and selling the former but retaining the latter as a “headache-free” income stream for them and their next-of-kin. My real estate colleagues will have a view on the extent to which property is “headache-free”, but a restructure of this sort requires careful consideration and input from tax as well as legal advisers.

Whatever decisions are reached, experience shows that it is never too early to engage with professionals when planning to sell.

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