Selling your business: the impact on your family
Many businesses involve numerous family members. Have you considered the implications for their future inheritance?
The biggest risk to family wealth is posed by fallouts and missteps among family members, rather than external difficulties, a recent survey reveals.
Almost half (49%) of wealthy families surveyed by Cazenove Capital cited this as the biggest threat, with the most commonly-selected answer being “poor or non-existent family leadership”. This was followed by “family conflicts leading to the break-up of the family asset base,” and then “inadequate engagement with the younger generation”.
All of these issues are apparent when selling a family business. “We think of business owners selling out for large sums of money, sailing off into the sunset. In reality, the worry almost transitions from business to the personal elements,” says Nick Sanderson, Portfolio Director at Cazenove Capital.
Before planning a business exit, Nick always recommends that entrepreneurs discuss the decision with their family as it can have a profound impact on them. Some family members may work for the company, with aspirations to take over the reins, others may have been planning on joining in the future. The abrupt change in financial circumstances can also have wide-ranging impacts on those closest to you.
“Coming into a life-changing amount of money does not just throw the entrepreneur into the spotlight – but also potentially their family and children,” says Nick.
When working with business owners Nick finds that, first and foremost, they are concerned with whether they have sold the company to the right partner. Secondly, they want to know that they can sustain their own and their family’s lifestyle on the sale and earn-out proceeds. “They also need to know that the sale is not going to harm elements of their family life,” Nick explains.
Who is your wealth for?
When wealthy families were asked how they viewed the purpose of their wealth, two-thirds (63%) said that they saw themselves as custodians for future generations. Indeed, many business owners decide to sell for the benefit of their families. However, family arguments often crop up around issues of inheritance and succession – particularly the dilemma of indivisible assets.
“Wealth brings new goals and responsibilities. We work with clients as early as possible to understand what they want their money to achieve. Alongside securing their lifestyle, this may include providing an inheritance for any family members they may leave behind them. Recognising this as early as possible allows for effective tax and succession planning,” Nick explains.
Dividing family assets fairly
The survey of wealthy clients found that bequeathing assets on an equal-ownership basis was the most common solution (48%) when dividing family assets. However, this can be problematic. When applying this approach to a family business, some individuals are often more interested in being active shareholders than others. Passive shareholders can create issues for more active owners.
The second most popular solution (35%) is to allocate a large asset – such as a company or property – to an interested individual and compensate other members with assets of a similar value. Nick argues that this is often one of the most effective ways to deal with the issue, as an actively interested child or spouse can take over company responsibilities, while less interested parties are not left feeling short-changed.
Only 7% of wealthy families said that they chose to sell the business and divide the assets equally. This is perhaps unsurprising for those in multi-generational family businesses. Exiting a company can be extremely difficult for someone who feels that they're taking away their children’s future.
Andrew Towers, Wealth Planning Director at Cazenove Capital, once worked with a business owner who had three children. He agreed to sell his company for a nine-figure sum. The client pulled the plug on the deal in its final stages because he didn’t want to deprive his son of the opportunities he had had in the company.
“He had two children with smaller stakes in the business. The business owner wanted to exit the business so that they were free to pursue other activities and hobbies. But it was completely different for his eldest son: his pure passion was the business and that had been his life for 30-odd years,” Andrew explains.
He emphasises the importance of understanding the dynamics of each of the different family members. “It's extremely pressured and emotional at this stage,” Andrew adds.
Despite this, Nick says many businesses exits are a huge force for good. Some families have donated large sums to charity or set up philanthropic trusts and many have used the profits to financially support family members in need.
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