Expert View GETTING
RELATIONSHIPS RIGHT
by Sally Eastwood Associate partner, Farleys
In family-owned businesses, the nature of the employment relationship is often agreed on an informal basis and the implementation of contracts of employments, directors service agreements and staff handbooks are overlooked, to the detriment of the business.
Situations can arise where one family member is looking to remove another due to a breakdown in the family relationship, an act of misconduct, or an issue with poor performance, so it is important to have these documents in place.
In addition, care should be taken to avoid special treatment. Family members must follow the same policies and procedures, usually set out in the staff handbook, as others, including standards of conduct, absenteeism and claiming expenses.
Inconsistent treatment could result in claims of discrimination or constructive dismissal if, for example, a non-family member is
Make sure your assets are sited in lower risk environments, be that parent companies, pension schemes and others.”
Jenny Pape, tax partner at business advisory and accountancy group Azets in Lancaster and Preston, says: “There is a saying that one generation earns the wealth, the next maintains the wealth and the third generation spends the wealth.
“Breaking this cycle is important, and as custodians of ‘the wealth’, one of the biggest responsibilities for the family is to plan for succession.”
Reasons for succession planning vary from family to family, but common triggers include too many generations in the business making it unwieldy to manage.
There may be a desire to make provision for adult children who are not part of the business, younger family members may be joining, or someone is looking to retire or make an exit. High levels of conflict or a frustrated family member can also send the subject to the top of the agenda.
Jenny says: “The earlier a plan is made the more options there are available. It is a long- term strategy that requires thought and buy-in from all parties involved.
“There are many tax implications related to the transfer of assets and these can have a large effect on those inheriting assets and businesses.
“Decisions on the division of assets within a family have long term implications. The aim is to have good communication with all parties to minimise the risk of expensive family conflicts
subjected to a disciplinary sanction more severe than a family member.
When hiring or promoting, employers should select the most qualified individual for the position, regardless of family status. A fair recruitment policy should be drafted and followed.
A family member’s role and all other workers’ roles should be set out in job descriptions where responsibilities should be clearly defined, which is likely to reduce conflict. Just because an employee happens to be the business owner’s sister, for example, may not mean she has the authority to appoint or dismiss staff.
All employees should undergo the same performance process. The business and the family member will benefit from honest feedback about areas for improvement and strengths. Where possible, include input from non-family members to limit the perception of bias.
and division which can occur many years in the future.
“It is useful for families to openly discuss the issues in order to reach an equitable or practical solution.”
She adds: “Once the business and family issues are understood, the starting point is often to look at the financial statements to establish who owns what, how much is it worth, and ultimately assess what each family member’s shares or capital account is actually worth.
“Because financial statements record property at historic cost, there is usually a need to revalue property to market value. The stage the succession journey is at would influence whether an informal estimate of value is sufficient or whether a professional valuation is required.”
After real values, pension funds and potential tax liabilities are established, the next step is to consider income requirements of the different generations, review existing bank debts and assess the capacity of the business to repay existing or potentially take on new debt.
Options for creating separate businesses, allowing family members control of their own destiny, may also be considered.
Jenny says: “Once all these facts are assembled, formulating the plan and getting it written down in black and white for review and revision is the second hardest part, after actually starting the process.
“The written plan may contain a series of different options, with the pros and cons of each. Encouraging all parties to discuss and build the plan will assist with buy-in.”
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LEGAL VIEW
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