While every family business needs to plan for the future, conversations about what this means in practice aren’t always easy. The Logan family of hit TV programme Succession springs to mind as one example of how not to hand over a business from one generation to another.
One of the primary strengths of family businesses, however, can lie in their long-term perspective. Family-owned enterprises often prioritise sustainability over immediate gains, whilst aiming to leave a positive legacy for future generations.
Yet succession planning can be a delicate process; and planning ahead is not just needed as we get older and potentially lose the capacity to make decisions. Illnesses and accidents can change the fortunes of a business overnight.
Conversations about such risks are vital to protect the long-term future of a business. Here are our three top tips for any family firm planning how to manage potential capacity issues, illness and lasting power of attorney.
1. Communicate, Communicate, Communicate
The first step is to have those potentially difficult conversations that are easy to put off. When publishing a report about the families that STEP members advise, and their wealth and succession planning needs, we asked what one piece of advice they would give.
Respondents overwhelmingly identified communication and, in particular, early and open conversations about planning and succession within families.
This means putting aside time for everyone concerned to have an honest, open conversation about succession planning. This can avoid upset in the future, which will benefit not only those crucial family relationships but also the business and its legacy.
2. Protect Your Business With A Power Of Attorney
Individuals can lose mental capacity because of dementia or sudden illness, such as a stroke. Fortunately, a Lasting Power of Attorney (LPA) allows you to nominate someone to take decisions on your behalf. There are two types: one for health and welfare matters, and another for property and financial affairs. However, it’s much less well known that an LPA can be put in place for a business. Sudden illness of the owner could have serious ramifications, so we strongly advise anyone involved in a family business to set this up.
If a business owner does not have an LPA and they lose capacity, the Court of Protection will appoint a ‘deputy’ who will have the power to run the business. This process can take several months; plenty of time for the decision-making processes and daily operations of a business to fall apart. Conversely, putting a business LPA in place ensures that a person you know and trust will take the reins immediately. As with personal LPAs, it is very important to choose the right person.
3. Don’t Wait To Take Action
A recent STEP survey found that the majority of solicitors and professionals have witnessed first-hand instances of actual or suspected financial abuse of a vulnerable person. A whopping 70% of STEP practitioners in the UK – including solicitors and those helping clients with estate and wealth planning – have observed instances of financial abuse or suspected financial abuse.
The report also considers growing mental incapacity issues among an increasingly ageing population. Cases of dementia are set to triple by 2050. In the UK alone, there are more than 900,000 people living with dementia and The Alzheimer’s Society estimates that this will rise to 1.6 million by 2040.
This underlines the importance of having an LPA in place and choosing someone you really trust. This may be a lawyer rather than a family member or friend. We urge those managing family businesses to seek expert legal advice and appoint only the most trusted family members, friends or legal professionals to act as representative.
Preparing For Any Eventuality
Lives can change very quickly and even the best laid plans may not cover every eventuality. If your family business needs to remove a director due to sudden illness, for instance, it’s important to navigate the process of applying to the Court of Protection to appoint a deputy. We would also welcome wider cross-border recognition of LPAs, which will benefit an increasing number of families whose assets are spread across different countries.
Family businesses are a significant contributor to the global economy in terms of employment, income generation, taxes, wealth and philanthropic endeavours. They contribute significantly to both local and international economies.
Logan Roy and his offspring in Succession scheme amongst each other to take over their family-owned media conglomerate, proving that it can be a messy thing being in business with family. But with strategic forward planning, it doesn’t have to be. Forward planning can ensure your business continues to flourish for generations to come.
About STEP - STEP is the global professional body for inheritance advisors, with over 21,000 members in around 100 countries. STEP helps families plan for their futures, from drafting wills to issues surrounding international families, protecting the vulnerable, family businesses and philanthropic giving.