In this article, Sangeeta Rabadia, a private wealth lawyer with extensive experience in succession planning for family businesses discusses how to overcome the challenges that arise.
What are the main stages in succession planning for family businesses?
No matter where your business is in its operational and management life cycle, it is important to always consider succession planning. This will be a very hot topic, and the first thing on the agenda when certain things happen in the family or business. This could be an expansion of the business, or more family members joining the company. Or it may be the older generation deciding to step back. For family businesses, births and deaths as well as marriages can have a significant impact.
What are some of the most important factors to consider during this process?
It is important for a family business to run smoothly and without major problems, to plan ahead. There is no time like the present to talk about governance in a family-owned business. I often have this conversation with my clients as their business grows.
Good governance documents will promote open and honest discussion. This will ensure that family members know where they fit and can voice any concerns. The governing documents can be reviewed and updated regularly to reflect changes in the business or the involvement of the family.
It’s easy to become distracted by the day-to-day running of a business, and ignore the difficult and sometimes emotional conversations. These questions are difficult for many family members to answer, but they are necessary to have a successful business.
- When will the patriarch retire from his position?
- How will retirement be? Will they keep a portion of the company?
- How will the remuneration of active members be determined?
- How do you choose who will be a senior leader in your organisation, such as the CEO?
- Will family members who are not working have an interest in the business? How will it work if so? Do they have any power to make decisions?
- What happens when family members disagree about something outside the family business. What will be the impact on their ability work together if they have a problem outside of the family business?
A good infrastructure to manage the family business within the company will make succession planning much easier. After that, one can move on to more practical matters such as transferring control or shares in a business efficiently and effectively.
Tax implications are often a major factor in succession planning. A good governing procedure will likely have taken into account tax implications and the impact of this is less significant.
It is important for a family business to run smoothly and without any major problems.
What are the common problems that you encounter when advising families on business succession?
Operationally, a family-owned company will operate just like any other. It is a nuisance that family dynamics and political issues can often dictate and drive the direction of an enterprise.
According to the Institute of Family Business, over 87% of UK businesses are owned by family members. However, less than 45% of these companies have a succession plan in place.
By addressing the difficult questions above, tragedies like that of the Yung Kee Family can be prevented. The founder of the roast goose restaurant died and his two sons were in disagreement on nearly everything. They ended up in court. As you can imagine, the company was closed and there are now huge divisions in the family. In this case, there was no succession plan and the consequences were grave.
Many times, the impact of personal succession planning on a family business is overlooked. It is important that you can gift your share of the family business as you wish when you’re drafting your will, or deciding who to give a power-of-attorney to. Shareholders’ agreements can contain clauses that dictate how shares should be handled, preventing your gift from being realized.
It may also be fine for your spouse have a power-of-attorney over your assets. However, a poorly written power of attorney may give you attorney rights in your business, which is completely inappropriate.
Clients also avoid discussing the marriage of a relative with an ownership stake. In the unfortunate case of divorce, in England and Wales the division of assets starts at 50:50. Your stake in the business would be included. Your ex-spouse’s interest in the family business is unlikely to be desired by you or other stakeholders. Without proper protections, such as a prenuptial contract, things could get messy.
Clients will often come to me to tell me that they’ve already taken steps to leave the business, or bring in someone else. Unfortunately, in most cases, these actions resulted in large tax bills that cannot be reversed or missed opportunities for tax planning, which means a big tax bill will be due.
It is also possible to have a difference in opinion between generations. Elder generations find it hard to let go of the daily management of an enterprise they have invested so much in. They may also not notice the entrepreneurial spirit of the younger generation.
How can they be best planned and overcome?
Simply put, a good set of governing documents and early preparation are essential. They are the basis for fostering a positive culture. It is important to regularly review documents and make sure they are still relevant.
It is important to have a good generational relationship. For the business to continue to grow and expand beyond the patriarchs, the next generation must be allowed to participate in its growth, expansion, and direction. The current situation is that family businesses are rarely able to survive beyond the 2 and 3 generations.
It is important to seek advice. The benefits of getting sound advice from specialists cannot be overstated. Your advisors can help you reach your goals without causing undue business disruption.
What is your experience of advising businesses and families on succession issues?
It is never a good time to engage in difficult conversations.
Family wealth and succession planning cannot be separated from the family business.
Succession plans that are successful must be carefully considered, reviewed and regularly revised.
What would you say to lawyers who are not familiar with family law, estate planning or succession planning?
It is not necessary for one person to do everything. I often work with a number of specialist advisors to ensure that the family business receives holistic advice. There is no need for just one person to handle everything. I work with several specialist advisors in order to provide a holistic approach to the family business.
As things stand today, most family businesses do not survive past the 2 and 3 generations.
It is important to recognize and understand the importance of effective planning. Many business owners do not realize that succession planning is important and will not take any action to address it. Anyone who advises a family-owned business should incorporate succession planning in their advice and work. This could be as simple as pointing them in the right direction or as complex as collaborating with other advisors on a solution.
Every family and business is unique, and there are no universal strategies or structures that will work for all.
About Sangeeta Raadia
Tell us about your legal career and how you got into it.
Law was not initially my career choice. Although I was not initially interested in law, my interest grew during my time at university and I decided to pursue the Graduate Diploma. My legal career began as a paralegal in a small law firm. It was a fantastic experience, as I got to learn about so many different aspects of the law. I provided support to clients who had legal issues that required a deep understanding of complex legal concepts.
After I graduated, I was quickly promoted to partner. I have always enjoyed helping my clients achieve their goals while navigating complex and multifaceted issues. I have a passion for private wealth. I enjoy guiding people to find solutions for issues that may seem daunting. With my multi-dimensional background, I can offer clients practical and “outside the box” options.
I’ve always emphasized the importance of educating people on succession planning, and so I enjoy my speaking engagements in seminars and workshops.
I am also able to assist a variety of charities with their legal requirements. I am a current school governor at an all-girls school. I enjoy sharing my humble beginnings and how I’ve been able to succeed.
I am a member of the Society of Trust and Estate Practitioners and I serve as Vice-Chair on their Membership Panel.
What made you decide to specialize in estate and wealth planning?
Oddly, trust and equity law was not one of my favourite subjects in law school. In practice, however, it became my passion. In my first encounter with trust law, I was working on a property dispute. I began to become more familiar with trust law as I worked on property disputes. I also advised clients in estate and trust disputes.
My clients find that my expertise in dispute resolution is very valuable. I am uniquely positioned to help them put structures and procedures in place to prevent disputes from arising. It is exciting to be able to use complex legal concepts to help clients achieve their goals.
What are your plans for career development during the second half of 2023?
Spencer West is in a very exciting period. The firm has accomplished so much within a relatively short time frame and wants to continue on its current path. We are working on some exciting plans that will provide more services to clients and give them more access to the advice they require.
Sangeeta Rabadia, Partner
Longbow House is located at 20 Chiswell Street in London, EC1Y4TW.
Tel: +44 02079 258080 | +44 07713 440737
Fax: +44 02076 812600
Sangeeta Rabadia has many years’ experience in the legal profession. She provides advice to individuals and families of all generations regarding wealth, succession planning and wills, as well disputes involving trusts and estates. She uses trusts, companies, and other estate planning tools to protect wealth against unexpected events, such as incapacity, claims from third-parties, and to manage both domestic and international tax concerns. She provides advice on succession planning to families who have businesses, land, and property they want to pass down through their family, including specialist wills, and lasting power of attorney.
Spencer West, an award-winning international law firm, provides full-service legal advice to businesses and individuals in the UK and around the world. Its core values are collaboration, entrepreneurship, and excellence. The firm’s lawyers are experts in their fields and have a global outlook and international presence. They can advise on matters relating to corporate, commercial, disputes, and private wealth across multiple jurisdictions.