Scotland has almost 300,000 family businesses, representing a staggering 83.9 per cent of private enterprises, so it is understandable that they are seen as the bedrock of the country’s growth.
As major employers, families rely upon these entities for their living, and the income generated is ploughed directly back into our economy. Given that the top 100 Scottish family firms generate approximately £22.6 billion for the economy every year and employ more than 874,000 people, family businesses can safely be described as a crucial source of growth and success for the Scottish economy across all sectors, including retail, food and drink, property and construction.
With continuity for future generations being one of their most prominent aims, it is important to consider how family businesses can plan for their future. The earlier the next generation is exposed to the family business the better, because it allows them to decide if they want to become involved in the future.
There tends to be a few triggers that prompt family businesses to look for help and put formal governance in place. There are the usual prompts: death, divorce, or the lack of a successor from the family to take over the business. These are all important, and the most successful family businesses have formal governance in place before the family is put into a state of shock – a tough environment in which to operate and make important decisions.
Often a well-organised family business may reach out for advice when they notice that the family values instilled in their family are not mirrored in the future partners of their kids. This circumstance is often the catalyst for owners to start introducing governance to protect the family business and its future from other outside influences. These may be shareholder agreements, rulings about who can and when they can become an owner of a family business, pre-nups or post-nups, or policies on employing family members. These are all used as means of protecting for the future and safeguarding against the common triggers highlighted.
More individuals are seeking advice about the protective measures which can be put in place to safeguard family business interests in the event of separation or divorce, and death, particularly when a second marriage is involved.
While Scots law provides a degree of protection to assets acquired before marriage, and inherited assets or those gifted to a party from a third party during the marriage, that is only the case if that gift or pre-marital asset remains in the same form. If assets are sold or realised, even for sound tax planning reasons, one could have inadvertently created matrimonial property where a claim can be made. The asset considered as matrimonial would be the value of that person’s shareholding at the date of separation, and possibly any directors loan account. Significantly, with a partnership, it would be the value in their capital account and/or any retained profit.
Pre-nups also protect a business from the untimely death of a family member. As long as a couple are married, even separated, and until either a Minute of Agreement in full and final settlement is entered into or they divorce, it is possible for a surviving spouse to claim upon the moveable estate of the deceased. Depending on whether there are children, the claim would be to half or one-third of the net moveable estate. A pre- or post-nuptial agreement can include provision to discharge the right to make this claim.
A carefully worded pre- or post-nuptial agreement can provide vital protection in these instances. Importantly, these agreements are binding, as long as the parties are consenting adults, and the provisions of the agreement are lawful. It is therefore wise to secure independent legal advice in good advance of the wedding before entering their pre-nuptial agreement.
If families truly view the protection of their business as
the most important family asset, succession planning measures are clearly crucial when safeguarding the family business for generations to come.