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Suspension of the UK’s Refugee Family Reunion scheme: an afront to the principle of family unity
Oliver Oldman
Most business owners are motivated by the idea of building something with an enduring value and creating a lasting legacy for future generations. However, many businesses fail to spend enough time considering what the future will look like once the founders are no longer involved. Companies and businesses that are family owned/controlled may find that the deceased’s shares are transferred outside of the family. Alternatively, it may result in family members such as the deceased shareholder’s widow suddenly having a majority ownership of a company which they have no desire or experience to run. A founder’s death can impact workers’ overall performance because the founder likely played an imperative role in holding the company together.
Failure to plan for business succession is a common oversight by many business owners. Unfortunately, creating a succession plan is often not high-priority for start-ups and longer-term businesses may put off succession planning because a founder’s death seems unlikely and other pressing issues seem more crucial.
Not having a succession plan can throw a business into chaos with challenges like the following:
Ideally, a succession plan will set out the next steps after a founder dies.
A succession plan and business continuity plan are essential for keeping a business going on a founder’s death. One of the reasons more businesses perhaps don’t plan is because they wrongly assume that their families will automatically benefit from the value built up in the business in the event of their death, but that is not necessarily the case. Usually that shares in a company will pass to the estate of the deceased to be distributed in accordance with the Will or intestacy.
If a company’s constitutional documents (articles of association and shareholders agreement) do not sufficiently deal with what happens on the death of a director and/or shareholder, this can provide practical difficulties which may prevent the company from carrying on business as usual. Moreover, if the founder was a sole director and sole shareholder, this brings it’s own complications about how the company can continue to be run immediately after death.
There are a number of questions you should be thinking about:
The best planning often starts with a comprehensive understanding of the financial landscape for any family and business. A clear understanding of the family dynamics, aspirations, priorities and medium and long-term goals is also needed.
Shareholders Agreement and articles for the company/business - It is imperative for business to have shareholder’s agreement and articles which set out how the business is run. These documents make it much easier to move forward in an orderly manner. The agreements can set out the intention for the shares, any pre-emption rights and options to purchase the shares.
Separate to the shareholders agreement, you should consider a plan for how you anticipate the company to continue including leadership and management. This is focussing on the practical aspects of running the business including those more emotional decisions. The starting point is often dialogue within the family and creating expectations and formalising plans can avoid conflicts post death and any costly legal challenges. Transparent conversations and the right structures and documents in place ensure that family businesses and the families that run them will have clarity and certainty for the future.
Founders can make their companies the beneficiaries of life insurance policies. Shareholder protection policies can allows shareholders to exercise an option for cash to be available to buy the shares in the business. Additionally, key person insurance can help replace lost revenue if a founder passes away. The business would pay the premium during the key person’s life and then be eligible to collect a benefit after they die. This payment may be essential to continuing business operations.
Any business owner or shareholder should also ensure that they have an up to date Will which stipulates what should happen to their shares on death. They should check that the Will is consistent with the company’s articles of association so there is no conflict or confusion. Business Property Relief trusts are a widely used estate planning tool to protect and preserve wealth and those should be considered when preparing the Will.
A founder’s unexpected death will almost certainly have negative consequences for a company. However, if the business establishes a succession plan and takes other prudent steps, it can cushion the impact. The future of a family business hinges on effective succession planning. Once a plan is in place, it then needs to be reviewed regularly particularly at important life events.
We can help guide business owners about how to plan for continuity and ensure their business provide the generational support intended when first established.
If you have any questions or concerns about the topics raised in this blog, please contact Diva Shah or any member of the Private Client team.
Diva is a Senior Associate in the private client team. She acts for various clients including high net worth individuals, entrepreneurs, executors, trustees and individuals who lack mental capacity on a broad range of matters including, lifetime succession and estate planning and succession planning for companies (well established companies and start-ups).
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
Oliver Oldman
Charlotte Daintith
Sharon Burkill
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