Ownership succession in the family business
The ownership succession process is an emotionally sensitive one and has the potential to create significant conflict between parents and children, and indeed between siblings themselves.
The key question in ownership succession is: “Who should own the shares in the family business in the next generation?”
There are essentially two views. On the one hand there is the view that ownership is the control and reward system for those working in the business (family and non-family). On the other hand, there is the view that the business is a vehicle for supporting the economic needs of the whole family as well as offering possible employment opportunities for future generations.
Consideration should be given to:
Voting trusts, whereby shareholders relinquish their voting powers to an appointed trustee or trustees but continue to receive a share of dividends are an alternative mechanism to voting and non-voting shares.
Having assets outside the family business may enhance a family’s options. If the ownership philosophy is that only family members working in the business should own shares or the parents consider that one or more of their children will not be appropriate owners of the family business (because they do not want to be, or would not be responsible, or because they would not cooperate with the new business leader), assets outside the family business could be used to achieve equality.
If the senior generation is financially dependent upon the company for income at retirement, separating property assets may enable them to move into a less active role in the business without a significant drop in income.
With each succeeding generation, shares become increasingly fractionated, family values more diluted, and a shared vision for the business more difficult to achieve. A number of commentators therefore advocate regular pruning of the ownership tree and the establishment of a buyout process and funds to enable this.
The ownership succession process is an emotionally sensitive one and has the potential to create significant conflict between parents and children, and indeed between siblings themselves.
The key question in ownership succession is: “Who should own the shares in the family business in the next generation?”
There are essentially two views. On the one hand there is the view that ownership is the control and reward system for those working in the business (family and non-family). On the other hand, there is the view that the business is a vehicle for supporting the economic needs of the whole family as well as offering possible employment opportunities for future generations.
Consideration should be given to:
| Who is family | – should ownership be restricted and to whom? |
| What is fair | - passing on the family business to those who value it and in a way that will safeguard its long-term survival. |
| Control | - what proportion of share capital and hence what control is appropriate |
| Outsider owners | - differences can breed a resentment that can be destructive to the effectiveness of the ownership group as a whole or harmful to personal relationships in the family. |
Voting trusts, whereby shareholders relinquish their voting powers to an appointed trustee or trustees but continue to receive a share of dividends are an alternative mechanism to voting and non-voting shares.
Having assets outside the family business may enhance a family’s options. If the ownership philosophy is that only family members working in the business should own shares or the parents consider that one or more of their children will not be appropriate owners of the family business (because they do not want to be, or would not be responsible, or because they would not cooperate with the new business leader), assets outside the family business could be used to achieve equality.
If the senior generation is financially dependent upon the company for income at retirement, separating property assets may enable them to move into a less active role in the business without a significant drop in income.
With each succeeding generation, shares become increasingly fractionated, family values more diluted, and a shared vision for the business more difficult to achieve. A number of commentators therefore advocate regular pruning of the ownership tree and the establishment of a buyout process and funds to enable this.