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Family Business Succession Planning and Legal Issues

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Understanding Family Business

Like any good lawyer, I’m going to start this with a definition. So a family business, as the name suggests, is a business which is actively owned, operated and managed by two or more members of a single family. Here, members may be related by blood, marriage or adoption. 

Basically, in a family business, a single family owns the majority percentage of the business and possesses the voting control, has the power over strategic decisions, has the involvement of multiple generations of the same family and the senior management of the firm is drawn by the same family. 


Importance of Family Businesses in Australia

Although the definition of family is ever changing and because of the shift in social norms, particularly in the last decade, the definition has expanded to include more people to an already complex structure. Why is this topic so important? 

Well, because family businesses are embedded in the fabric of the Australian economy. That is, family run businesses account for about 70 % of all businesses in Australia. There are over 1.4 million Australian family businesses operating in Australia. Australian consumers prefer to buy from family businesses.

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Succession Planning and Impact of an Aging Population

Further, according to a research paper published by the Family Business Australia in conjunction with Grant Thornton, because we have an ageing population, the succession or continuation of a family business is more prevalent now than ever. That is, baby boomers, which make up most of the owners or managers, are reaching retirement age. 

Some of the stats are that one in three businesses have not even considered succession or continuation planning. Just over half of the businesses in Australia have plans to transition leadership, which based on these figures is about 700 million Australian family businesses.


Legal Challenges and Added Rights within Family Enterprises

And two out of three family businesses with a succession plan will transition the business to a family member. When you think about the intergenerational transfer of wealth that will occur in the next five to 15 years, if there is no planning in place to give the business every chance of success, it can lead to disputes and undo decades and decades of hard work. Family businesses provide a unique set of challenges to any succession lawyer and implementing an estate plan for a member of a family business and then implementing that plan into the family business structure.

To take a step back, even when people that are not family members go into business, the rate of those businesses failing is a little over half, which is a really big amount. Now to contrast that figure into a family business structure where because the business partners are normally family members, understanding of the family dynamic and how the business operates is critical to have an enduring family business. 

That is, where two non-family members go into business, their legal rights and remedies if they want to dissolve the business and go their separate ways are limited to a commercial law. That is, there can be a shareholder, a partnership or trust dispute depending on the structure of the business.

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Managing Family Dynamics and Effective Communication

Although when advising a family business of these issues, there are all these commercial avenues to resolve a dispute, but because in the family business, your business partners are also family members like a spouse or a child or a grandchild of the controlling party, then there are additional rights and remedies that can be pursued under the umbrella of succession law. 

So to expand on this, if a controller of a business dies, a family member can make a claim for a further embedded provision from an estate or a testamentary promise or other contractual or equitable arguments. The point is, in the context of a family business, there are more ways for someone to make a claim on an estate or a family business, which in most cases will impact on the operation and profitability of the business.

Although the legal challenges for a family business are vast, depending on the different characteristics of the family members that operate or intend to operate the business, I have been on assignments where the families are, from an objective perspective, dysfunctional, but they are able to run a very successful business. 

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In other cases, I have been involved in assignments where the members of the family business appear to be quite harmonious, but when you talk to them alone it is apparent they are not on the same page and the real issue is that they cannot communicate effectively to each other. 

As I touched on earlier, there are more avenues with a family business that things can go wrong and when they go wrong they normally go very wrong. That is because when a non-family member ends their business they normally want to exit the business with as little expense as possible, but for family members, I hear a lot. It’s not about the money, it’s about the principle. 

Now trying to pursue your legal right because of a principle is often very expensive and detrimental to the successful operation of the family business. Although death of a controlling member of the business, where it’s not clear and considered succession planning in place, can lead to estate disputes about who should get control of their estate, which would include arguments about who should control or run the business. 

Even if those issues are determined, then sometimes when, for example, children have control of the business they have very different versions of how the business should run, which can lead to legal disputes. You have to remember we can’t lose sight of the human element in all of this. These disputes are happening at a time when they have lost a loved one and are normally grieving and in some circumstances, it can bring out the worst in people.


Legal Implications in Divorce and Property Settlements

Another common legal issue for family businesses is the impact that divorce of a family member that owns shares in the business. That is because when they conduct their property settlement, the part of the business they own forms part of the property pool and is up for grabs in any family law dispute. 

Having a considered family business succession plan ensuring that all members of the family are on the same page is vital to the continued success of any family business. If you want your family business to enjoy into the future, please do not hesitate to contact us. Thank you.

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