Family businesses are hugely important to Scotland’s economy. Ranging from micro-businesses run from spare rooms to household names, they account for almost 70% of small and medium-sized businesses in Scotland.
Many of the facts and figures around family businesses are impressive. For example, there is evidence they outperform the FTSE All-Share Index. But there are also more worrying statistics, such as the fact that only a third survive into the second generation.*
Research shows that most conflicts and tensions in family firms arise from personal issues such as succession or relationship problems, and that more fail for family reasons than business-related reasons. Issues around succession planning, Wills, Powers of Attorney (PoA), and Prenuptial Agreements can be as important to the sustained success of the business as the commercial law side.
Put bluntly, without these arrangements in place, what happens in the family - from divorce to intestacy – could jeopardise the future of business. Or at least subject it to lengthy litigation and forensic accounting processes. Not only are these expensive but they can drain the energy of the business and create long-lasting family disputes.
Probably the most critical issue to consider is succession planning. If someone dies without a Will in Scotland (and it is estimated that more than three out of five people do this), their estate is administered according to the intestacy laws.
In practice, this means that rather than the business passing in a planned way from one sibling or generation to another, its future will be decided by the law. In some cases, this leads to very young children or distant relatives inheriting control of the business.
Making a Will can avoid such problems, but when doing so, the personal and the commercial elements should not be treated in isolation. The provisions of the Will and the business’s articles of association or partnership agreements must align.
Other possible issues to consider include:
- Power of Attorney: this helps ensure business as usual – from paying bills to signing contracts – if a business owner or partner cannot work as a result of serious illness or accident. Powers of Attorney are often viewed (wrongly) as relevant only to the elderly or infirm. In fact, they can be pivotal to the continuity of a business if a key person suffers a loss of capacity, either temporarily or permanently, and are relevant even to the youngest and fittest of business owners.
- Prenuptial or cohabitation agreements: in family businesses, decisions around corporate structure, share issues and personnel are often based on commercial or tax reasons. In this planning, it is easy to overlook the consequences of relationship breakdowns for the business. Incorporating family law advice, as well as corporate and tax advice, in this planning can protect the future of the business. Prenuptial contracts or cohabitation agreements can ringfence a family business from being included in divorce or separation settlements, thereby safeguarding its future.
In the midst of all the paperwork that faces business owners, it is understandable to want to limit the legal arrangements involved. Especially when they involve events that may never happen.
However, it may help to think of it this way. If you asked Scotland’s 60,000 family businesses whether they’d be happy to let a stranger take control of their future, they would probably send you packing.
If you also told them that the stranger might not consider their commercial activities, customers or marketplace when deciding on their future – well, their response might not be polite.
Yet, the law in Scotland around intestacy, marriage settlements or incapacity mean that, if certain events or misfortunes occur and family members don’t have Wills, PoAs or prenups or cohabitation agreements in place, then the future of the business could be left to lawyers and courts.
Far better to plan this future yourself by putting in place your own provisions for succession, attorneys and relationship ups and downs.
* Source for data: Scottish Family Business Association.