It’s a common saying that you shouldn’t mix business and personal.

But for the 280,000 family-owned and owner-managed businesses in Scotland – representing 84% of all businesses operating here – business and personal are very much intertwined. For most, the business is the owner’s way of providing for their family, now and for long into the future. What could be more personal than that?

At Burness Paull, we work with many owner-managers operating across a range of sectors.

Traditionally, our work has focussed on the commercial side of things. Much of what corporate lawyers do tends to follow a reasonably well trodden and understood path, advising on governance, financing, commercial contracts, and sale and purchase agreements. Of course, each transaction or issue brings its own variations and challenges, but generally there is a decent level of structure to be followed.

However, owner-managed enterprises increasingly require holistic and joined-up advice that properly considers business and personal circumstances in the round. 

It’s amazing how often that sophisticated people running successful companies fail to realise how their personal lives can impact the business and plan accordingly.

Sometimes, it’s simply the case that these issues fall to the bottom of the priority list and the business owner doesn’t have the bandwidth while they are busy doing a deal, working on raising cash, hiring staff, opening a facility, or expanding into a new market.

For some, managing the business is the easy bit and dealing with complex family dynamics is more difficult.

Whatever the reason, succession planning, personal tax, the potential impact of a separation or divorce, and powers of attorney to account for the possibility of incapacity are all areas we encourage our clients to address proactively to avoid undesirable and costly consequences further down the track.

This can be an emotive area, particularly in the case of blended families and where there are multiple generations involved in the running of the business.

The hit television drama Succession – which centres on the fictional Roy family and the fight among family members for control of the global media conglomerate that they own amid uncertainty around the ageing patriarch’s health – touches on some these issues, albeit in a more dramatic, cut-throat way than I’ve come across during my career.

Getting your planning wrong or not having any safeguards in place can cause chaos to ensue in the form of disputes, significant financial costs, or even the loss of control of a business that has been built up over several generations.

For example, it’s the intention in many owner-managed businesses that control and the running of the company is assumed by the next generation at the appropriate time. 

This is often well understood and practical steps are taken to ready the next generation for taking over, such as bringing them into the business years in advance, gradually giving them more responsibility, and then elevating them to the management team before officially passing over control.

In some cases, it may be the wish that one child inherits more of the business in line with them being involved in its running. However, it’s worth remembering that, in Scotland, you cannot entirely exclude your spouse or children from your estate. We have seen cases where offspring that are not involved in the company have a claim over the value of the business, even where shares have been left to children running the organisation.

Therefore, this requires careful management and the establishment of investment vehicles that facilitate the change in ownership, release value and mitigate inheritance tax, without which many businesses wouldn’t be able to continue as a going concern when they are passed on.

So far, so good – provided it’s planned and executed well.

It’s often a lack of preparation for the unexpected that can cause issues. For example, a common tax mitigation measure deployed by business owners is to allocate shares to their spouse. But what if that relationship breaks down? What was savvy from a tax perspective could create problems during an acrimonious divorce. 

In some companies, the articles of association make it clear that shares can only be held by the mother or father’s bloodline. This means many believe that in divorce proceedings, the business is not considered to be matrimonial property and cannot be claimed by the owner’s spouse. 

Ordinarily, this would be true. The problem arises when those inherited shares were exchanged for shares in a new holding company as part of a tax-driven reorganisation. Under Scottish family law, the value of those shares is now likely to be open to claims by that spouse.

It’s not just your own relationship you need to worry about, either. If part of your succession plan is passing on shares to your children, who they marry – particularly if the relationship breaks down – can impact the business.

There are also circumstances that we hope never come to pass but that we nevertheless need to prepare for.

What happens in the event of premature death? Who controls your estate and who do your shares pass to? 

Similarly, who takes care of your finances and welfare if you are incapacitated as a result of an accident or ill health?

Appointing executors, beneficiaries and attorneys through properly drafted wills and powers of attorney that are regularly reviewed to account for changing circumstances will help ensure your wishes are respected should the worst come to pass.

Having said that, it’s important to keep track of who holds power of attorney on your behalf. Often business owners are asked to sign powers of attorney when in the cut and thrust of transactions or to allow matters to be dealt with while they are travelling. We have seen examples of owners losing sight of what powers of attorney are out there, with a couple of instances where they remain standing in favour of previous spouses – which is clearly not desirable.

All of these issues are interlinked and it’s hugely important to pick them up from the ‘too difficult’ pile and get it right. Some of our most satisfying work involves bringing together the experience of our corporate, private client, family and tax lawyers to work together to help business owners navigate these complexities – and sleep a little easier at night!

This piece originally ran in the December edition of The Herald’s Business HQ Monthly

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