Family-Owned Businesses: preparing for the next generation of leaders - Boodle Hatfield

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23 Nov 2022

Family-Owned Businesses: preparing for the next generation of leaders

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Clare Stirzaker View profile
5 min read

Every time I work with family businesses on succession planning projects, the topic of divorce risk will always arise - there's always a lingering fear of what the future holds as the business starts to pass down the generations and the extent to which divorce could break up both the family and the business. Unsurprisingly, few understand our complex divorce laws and processes in the UK, and base their questions and fears on the experiences of others.

Are pre-nups the answer? Can trusts help? Will we be forced to split up the business? 

These are some of the common questions that I am asked to tackle and, luckily, I have excellent family law specialists who I can draft in to help educate and inform. But once informed of the basics, families still need to work out their strategy for tackling divorce risk and, most importantly, identifying how they go about communicating this within the family. Dropping in a "pre-nup" chat, pre-marriage/civil partnership is not easy and many see it as something of a taboo topic and would prefer not to tackle what they perceive to be a very difficult conversation where the topics of business and love become intertwined. As relationships evolve and where multiple marriages may become ever more likely, being able to communicate openly and transparently about the risks posed to the family pot of wealth from relationship breakdowns Is really important. My family law colleagues held a fascinating panel discussion earlier this year that centred around what drives our relationships and whether marriage still has a place in modern society (More on this event can be found here.)

I've enclosed some headline ideas from my experiences of working with family businesses, as to how this topic could best be considered and managed, particularly through the use of family governance processes and tools.

  • Communication: Families with an established family governance structure, are often in a far easier place to manage divorce discussions. They will have spent time as a family group agreeing how and why they want to own and protect the business for the long-term, typically with a clear intention to transfer the business down to the next generation. They may use language such as "stewardship" or "custodians" to describe their period of ownership, demonstrating their respect for the business and the desire to protect the value that has grown over time. Family retreats, family meetings, family constitutions will be some of the likely tools they will use to emphasise such messaging, so that it becomes an ingrained part of the DNA of the family.

    External parties entering the family through relationships, will be able to see that there's a clear desire to protect the business for the long-term, and so entering into legal documents such as pre-nups are far more easily framed and explained. Clearly whether it is optional or mandatory to enter into pre-nups or post-nups will depend on the family and their cultural beliefs/values, but at the very least having this as an item that needs to be considered and ideally implemented, needs to become part of the common family business parlance and not remain a taboo topic.

  • Education: Family constitutions will typically have a section dealing with divorce risk and the desire for family members to have pre-nups or post-nups and, indeed, may have policies around whether spouses should be able to work in the family business. But to get a family to agree to include such provisions may not always be easy in the first instance and, in my experience, education on divorce risk and the value of legal tools such as pre-nups need to be provided to help everyone agree that this is the right approach to take. Extending such training to the next generation is particularly important to provide them with sufficient opportunity to understand why this is being asked of them and ensure they buy into the process.

  • Advice: Forewarned is forearmed - I have come across too many instances where families have not fully appreciated how to manage the legal risks in connection with divorce. Poorly drafted legal and family governance documents such as Wills, letters of wishes and family constitution; lack of control around disclosure of information; allowing spouses "into the tent" to discuss family business matters or not allowing them in at all - such actions can have detrimental consequences when it comes to a divorce and can also give rise to family tensions. Consulting a family lawyer at an earlier stage on how you specifically manage divorce risk within a family business, well before the event, can be enormously helpful, particularly when developing your family governance framework and tools. It will enable you to develop the right strategy for your family business that takes account of your family relationships, culture and so pragmatically assess how best to manage such risks within your family group.

Divorce cannot remain a taboo topic for family businesses, as the risks to the business, and ultimately the family, are too great. Being better educated on the risks and working out the right strategy for your family should be a key part of your overall succession planning to help protect against the English legal system effecting unwanted change.

We will continue to explore taboo topics for families and their businesses in the coming months and how they can best be discussed. In the meantime, Family Partner, Katie O'Callaghan has penned a guide looking at the power play of love & the legacy in family-owned business – available here. In this she details the range of tried and tested legal mechanisms that families and their associated enterprises can exercise to mitigate the impact of a divorce or relationship breakdown on the future of a family business. It's definitely worth a read!

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