In the context of a family business, succession will involve a transfer from the older generation to the younger generation.

As is the case with the wider economy, many businesses within the agricultural and rural business sectors are family-owned.

Broadly, a family business can be identified as one where there is involvement of two or more family members, and control lies with the family.

The two core elements of succession are management succession and ownership succession.

In practical terms, this process will take many years to fully evolve.

The transfer of management responsibility is often the first to occur.

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Management succession

Management succession should be a process that takes place over time and is not a one-off event. The transition process is likely to last a number of years.

Typically, a management succession process might begin by the socialisation of the next generation as they grow up with the family business when they are children. This may also include work experience within the family business, which culminates in a genuine occupational choice.

The next step would be employment/full time work with the family business, including promotion, mentoring and supervision.

Finally, the older generation would pass management responsibilities to the next generation.

Generally speaking, family business survival rates from one generation to the next tend to be low.

Many obstacles to management succession can be identified.

For example, these may include a dependence on the founder or the older generation, no natural successor can be identified, there may be no financial security for the older generation to retire, there may also be an absence of planning for succession, and not uncommonly, there may be a reluctance of the older generation to let go.

The older generation have a responsibility to lead succession planning, but it is important that all family members participate.

Ownership complexities may also create issues for management succession planning. 

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Ownership succession

Effective ownership planning requires communication between generations over a protracted period of time.

Preferably, family members will need to articulate a shared ownership vision for the future. In this respect, it may be helpful for family members to agree on an ownership philosophy.

In other words, who should own shares and why? It may be that the family will need to reconcile the interests of those family members who work day-to-day in the business against those who do not.

For example, should the children own the business equally? Would this still be the case if some of the children don’t work in the business on a day-to-day basis? It is also worth noting that any transition becomes more complex when more people are involved.

With fewer people, it can be easier to develop a shared vision. It can also be said that if there are uncertainties in respect of future ownership, this can be detrimental to trade.

Ownership succession

Factors influencing the ownership approach will include:

  • the financial resources of the family firm (this may determine how many family members the business can support);
  • the extent of family assets outside of the firm (family members not directly involved in the business can take a larger share of these);
  • the needs and financial position of family members who are not involved in the business on a day to day basis;
  • the financial security of the older generation, past or traditional ownership practice within the business;
  • family dynamics (i.e. family cohesion/conflict);
  • governance approach (this may include remuneration, dividend policy);
  • the purpose of ownership (this may be “custodianship” where ownership is seen in the context of passing within the family from generation to generation or preparing for a sale).

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Ownership structures

The business can be structured, or the arrangements tailored in such a way so as to suit the precise requirements of the business and the individuals involved.

Examples of ownership structures include:

  • real estate assets or agricultural land is owned by the wider family and the operating business is owned by members of the family who work in the business;
  • voting shares (for family members working in the business) and non-voting shares (for family members not working in the business);
  • shareholders relinquish voting powers to an appointed trustee but continue to receive dividends (alternative to voting/non-voting shares);
  • the use of “freezer”, “flowering”, or “growth” shares (i.e. where the next generation participate in the value created by the growth of the business);
  • all family members hold shares, but members of the family who work in the business also hold additional employee shares or share options;
  • wider family members hold preference shares (providing preferential dividend rights), whilst members of the family who work in the business hold ordinary shares; 
  • the adoption of a family investment company with separate classes of shares for different family members and/or the use of trusts where economic interests are discretionary; and
  • family business buy-out (family members working in the business buy-out the older generation).

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Other options

Many family firms will have a working bias toward family leadership succession.

But this is not the only option.

A sale, listing, non-family management buy-out/employee incentive scheme, or, in some cases, closure of the business may be more appropriate. 

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The importance of the succession process to the wealth, legacy and happiness of the business owning family cannot be underestimated.

The succession process needs to explore the commitment of the wider business family and viable alternatives before settling on a solution.

In practical terms, the primary responsibility is on the senior generation to drive the succession process, but it is important that the whole family participate.

Families that avoid talking about succession and fail to address succession from an early stage are seriously limiting their prospects of achieving a successful outcome.

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The Agricultural and Landed Estates sector group at Myerson draws on specialists from across the firm (including corporate, commercial, real estate, trusts and probate, employment, family and litigation (including commercial, probate and real estate) to provide joined-up solutions for our clients.

If you have any questions please do get in touch.