Family business: How to avoid a succession nightmare scenario
When family members fall out over succession, 'the parents lose, the children lose and the business loses'. Photograph: iStock
For a family business to survive long term, serious consideration must be given to who will succeed Mum and Dad. The first step is to determine whether the next generation wants it.
“Not everybody wants to run a business or has an interest,” says Alan Murray, tax partner at Forvis Mazars.
Often one sibling works in the business and others don’t, which can create challenges.
“The issue is that, in the majority of situations, 90 per cent of the ‘family silver’ is wrapped up in the business. So how do you then provide for sibling number two or three?”
In some cases, selling may be the fairest option, allowing parents to divide the proceeds rather than leaving the company to someone who may not want the responsibility.
But while early planning is crucial, such discussions are often triggered by unexpected events such as a health scare or an unsolicited offer.
Another challenge can be the personality of the founder, says Stephen Gahan, also a tax partner at Forvis Mazars.
“The founder of any business is typically a strong character with a clear entrepreneurial spirit. That’s what drives them forward. But that’s also what can make it very hard for them to let go,” explains Gahan.
Seeing the family fall out over succession is the “nightmare scenario” for most founders, Murray says, as “the parents lose, the children lose and the business loses”.
Clear communication about your intentions, both as founders of the business and parents of the family, is key, “so that people aren’t finding out when they’re reading a will”, he adds.
One tool that can help is a family constitution, a document outlining the principles and rules of the business.
“Family constitutions are becoming more common as businesses become more complex and often include multiple generations working in the same business,” explains Kevin Doherty, a director at Davy.
“They tend to be drafted as a set of values or principles to which family members adhere. They give guidelines around important matters pertaining to the family business, such as succession, decision making and family business roles,” he says.
For example, it might specify that family members need certain qualifications or outside experience before taking a management role.
“They are not formal legal agreements. The effectiveness comes from the fact that family members buy into the values that the document captures,” he explains.
Mairead Harbron, partner at PwC Private, says one of the biggest mistakes she sees in succession planning is a lack of clear rules around ownership. She recommends putting a robust shareholder agreement in place.
It “takes the guesswork out of it and answers the tough questions before they become personal, such as who can own shares, can they be passed to a spouse, and what happens if someone wants out or gets divorced?” she explains.
Keeping voting shares within the “bloodline” while allowing others to benefit through non-voting shares can help balance family interests.
“It’s about being fair, which isn’t always the same as being equal. This structure, often supplemented by a family charter that outlines shared values, ensures clarity, fairness, and helps prevent future disputes,” says Harbron.
Tax planning is critical. Bruce Stanley, tax consulting partner at HLB Ireland, says three main taxes arise when a business passes from one generation to the next: capital gains tax, capital acquisitions tax and stamp duty.
“For capital gains tax, the main relief is a retirement relief. If you are between 55 and 69 year of age, you can transfer up to €10 million worth of assets tax free. If you are 70 or over, that is restricted to €3 million,” he points out.
Because reliefs have conditions, tax planning should never be an afterthought.
“It is central,” says Stanley. “All businesses should sit down with their accountant at least once every year or two, just to have a state-of-play strategy in place in relation to their short-, medium- and long-term plans. And part of that is succession planning.” Andrew Kenny, head of tax at Focus Capital Partners, says thinking on succession has evolved.
“The realisation is that not everyone is equal when it comes to transitioning a business,” he says.
It’s why partial exits are common, particularly where some siblings are active in the company and others are not. “Sometimes they can’t afford to buy them out completely,” he explains.
Future growth can also be a driver.
“If a sibling goes and turns it into a €100 million business, but I took €2 million for my 20 per cent shareholding, I won’t like the sound of that,” says Kenny. “By keeping a small shareholding I don’t get a lot of say but I get a bit of upside if the business goes gangbusters. It’s sort of like an anti-embarrassment clause.” Another option is private equity.
“There’s plenty of funding for that but generally it’s not the most desirable funding for a family business because they don’t get to run it like a family any more. You’ve now got a private equity owner who calls the shots and is very financially driven, which is not always how a family business is run.”
If the business is to remain within the family, Kenny often suggests a family partnership.
These can have different groups of partners, general and limited. “General partners control the partnership, while limited partners are kind of silent partners,” he says “It’s great for estate planning because it allows you to bring family members in as limited partners, give them an interest in the business, but not actually give them a lot of say, because the general partners run the business. So it’s a good way of delineating people’s roles within the business.
“It has proper legal standing, whereas a family charter is a bit woolly in implementation or enforcement, in certain scenarios.”
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