Passing a business on to the next generation?

Four Questions can Avoid a Gift Becoming a Curse

Introduction

The transfer of a family business from one generation to the next has the potential to create tension and conflict. Business owners and the next generation need to plan ahead develop a family constitution. Paul Keane recommends the four key questions family business owners need to answer in order to avoid a gift becoming a curse.

Family Agreement

Family businesses are often described as the bedrock of the Irish economy. They flourish in both rural and urban Ireland in all shapes and sizes. Developing a family agreement at an early stage can help avoid many of the common pitfalls family businesses face when younger generations come on board. Differing expectations and plans among family members can create tension and conflict and can even irrevocably break family relationships. Unfortunately, many business owners seek legal advice too late and after much of the damage has already been done. Planning ahead is crucial. Just four questions need to be answered to avoid a gift becoming a curse.

Solicitors see the same issues arise time and again whenever people are required to run a business together. Where family is involved, there are further layers of complexity.

It is commonly accepted that most family businesses do not make it beyond two generations. There are many reasons why this is so, but a failure to agree expectations and a lack of clarity and transparency in relation to basic business issues are major factors. By failing to plan for the future of the business, parents are risking their children ending up fighting it out, like cats in a bag.

Business owners should speak to their solicitor to avoid these problems. Solicitors have seen it all before; they can look around corners and anticipate problems that may arise later and put agreements in place to deal with them.

Four key questions

Here are the four key questions family business owners should answer in order to develop their family constitution.

1. Business plan: What are we doing?Ideally, the business should have a written business plan defining the goals of the business and the plans for reaching these. But even a general plan, with a mechanism for modifying it as circumstances evolve, is useful.

   Time and again, business owners failing to appreciate that the next generation have their own ideas for the family business. Conflict arises when different members of the family have different aspirations for the business. The whole family must be clear about what the business will and will not be.

2. Money in: What will be put into the business?Investments into the business need to be agreed in advance including any money, either as equity or a loan, and other resources, including an individual’s time and energy, and/or intellectual property.

   Family members need to agree on what each of them will put into the business, whether it’s their own money or their own sweat and effort. Different expectations can lead to big problems down the line.

3. Money out: What will be taken out of the business?Payments to family members, whether through salaries, pension contributions, expenses, or dividends all need to be agreed.

   Nothing tears a family apart quicker than money. It is critical that the family is transparent about who will receive what and when they will receive it.

4. Control: How will the business be run?Each family member’s individual role must be agreed and written down.

   This question boils down to who is the boss? Who has the final say when big decisions inevitably will have to be made? How will decisions be made when inevitably differing views emerge?

Unique challenges of family businesses

Family businesses present unique challenges that other business do not face. Relationships of many decades, often dating back to childhood, colour the way family members interact with one another and this can and does impact on the operation of the business.

Large and small businesses will benefit from planning ahead and creating a family constitution – it doesn’t need to be overly complex. What is critical is that those with a stake in the family business speak plainly about their expectations and that an agreement is made and written down. A solicitor’s advice and experience can be very useful in getting the family to be realistic and plan properly.

For further information on this topic, please contact Paul Keane at pkeane@reddycharlton.ie