Avoiding legal fallout in a family business
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Fiona Neilson, Partner and business lawyer at leading law firm Harper Macleod, highlights some common pitfalls for family businesses in the rural economy.
IT'S no surprise that family businesses make a significant contribution to Scotland's rural economy and communities. Rural business has historically been a family affair – in remote areas that may be as much a consequence of geography as family ties.
Family businesses range from large companies, including some of our most successful textiles, food and drink brands that have remained in family ownership for generations, to small or medium-sized businesses.
In today's rural economy, a family business may involve various enterprises, adapting with circumstances or family interests. What started as a traditional farming, fishing or forestry business may also be a metal fabrication, vehicle maintenance, quarrying, construction, transport and distribution or oil services business. Landowners set up renewable energy projects or take up festival and events management. Fish farming develops into seafood processing and packaging. Dairy farmers and growers add value by expanding into cheese, ice-cream, jam or rapeseed oil production.
Holiday letting, restaurant and retail provide alternative income streams. Craft makers offer courses, gallery and café space. IT and improved broadband bring new opportunities in publishing and business services. Whisky distilleries offer tours, tastings and catering. Craft brewing and gin distilling may be micro or large-scale operations.
Reward and risk
It can be difficult to manage such different activities within one business entity and key assets may be exposed to additional risks. New ventures may need to comply with additional regulations, invest in processes and equipment, recruit and train staff, negotiate purchase and supply contracts, design new branding (ensuring it doesn't breach a competitor's intellectual property rights) or terms and conditions appropriate for internet sales. Business strands may need to be separated and structures should be kept under review.
Add to that the complexity of modern family relationships and a family business is not without challenges!
If only some family members are involved in certain parts of the business, or they have different interests or skills, that may lead to friction. Major life events such as birth, adoption, marriage or civil partnership, separation or divorce, serious illness or death and personal family relationships all impact upon a family business.
Legal safety nets
The US TV series Succession is just the latest comedy drama to focus on the struggle for control of a fictional family company – an extreme portrayal but it underlines the potential for family dynamics to introduce discord. And yet "family" is often cited as a reason for not having formal legal agreements to govern family business relationships.
It is difficult, but should not infer lack of trust, for a family member to raise issues such as what if:
- the majority shareholder, director who founded a family company falls seriously ill or dies
- a daughter splits up with her civil partner who runs a profitable family business side-line
- the family home is a business asset and the family splits
- a non-family member is given shares in the business then leaves
- members of the next generation are not interested in carrying on the business
- some family members want to sell the business and others don't
These topics are easier to tackle before a crisis arises. Heightened personal emotions in a family business make it more important to agree in advance how to deal with potential hurdles, to record that formally, for each participant to make a will reflecting their intentions and to review those documents as family and other circumstances change.
Otherwise such critical events could threaten the business, the family's livelihood and the local community for generations to come.
fiona.neilson@harpermacleod.co.uk
Harper Macleod and SPP Media are hosting the first ever Scottish Highlands + Islands Rural Economy Conference and Awards in Inverness on November 21. There is still time to enter the awards, or to attend the events. To find out more, visit www.spp-group.com/the-shires-conference-awards
