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Employing ‘partners’ or ‘spouses’ in the family business

By Stephen Cowburn

Over the Christmas break l was reading an article about how relationships between married couples are likely to survive longer than relationships between partners, particularly when children are involved.

If commitment is at the heart of this then l guess that it is the reason many families agonise about whether the partner of the blood line relatives should be able to access the benefits of being part of the family business – whether through employment or dividends as a result of shares held.

The arguments for and against are summarised below:

Of course it’s a no-brainer that a spouse should be part of the family businessNot in a million years, I don’t want to dilute my legacy outside of my family
· Strong message that spouse is part of the family· I have built this business for my children; the risks of marital breakdown are too high
· Tax efficient way to distribute income· Buying back the shares is potentially difficult with a negative impact on cash flow
· Provide financial security for spouse and his/her nuclear family· I can just make sure that the spouse is given life assurance
· Spouses are parents of the next generation and by being involved in the business are more likely to be positively disposed towards the family business· It dilutes share ownership and makes decision making more complex
·Diluting the immediate family ownership weakens the family feel to the business
·Wealth and power are going to get transferred outside the immediate bloodline family

 

Reviewing the arguments, there are a lot of emotional reasons both for and against.

And yet, at the heart of this thorny issue is the ability of the family to separate family from the business and a good reason for the family to adopt a family constitution before this situation arises. Part of the development of the family constitution is to consider what the purpose of the family business is: is it to build a legacy for future generations of the family or, at the other extreme, is it to maximise returns for the immediate family before selling out. Depending on the answer, it provides a context for decisions about family ownership and how the family is going to interact with the business. This may make it easier for the family to decide the role of non bloodline relatives when it comes to their involvement in the family business.

The creation of a family constitution, if done by the first generation, has the advantage of being able to discuss the ‘what if’ questions rationally before any such event occurs.  So, for example, given contemporary divorce rates, rules could be put in place in the family constitution or via a freely entered into pre-nuptial agreement, that any shares held by a spouse would automatically be gifted back/or bought back to the bloodline family member in the event of divorce. This would also require clarity as to how the business was to be valued for the purposes of such a transaction.  Equally, if there are several children, the family could agree the rules as to how a situation is to be handled where one child does not want his/her spouse to be a shareholder.

In addition, an alternative solution is for spouses to be involved in the business through the Family Council where they are kept informed about the business but also could have a say in decisions affecting the business – the rules of engagement are all part of the overall family governance set-up.

There are many factors to take into consideration, which suggests then that it is a business decision fighting against the emotional family background

Some factors to consider might be:

  • What stage is the family business at – is it first, second, third generation and what precedent has been established in the past
  • How big is the family and so what is the likely impact of diluting the shareholding given the type of business
  • How effective is the family at communicating openly with each other

Above all, it is a predictable problem, the risks of which can be mitigated against. So whatever your family structure, think about creating a family constitution and family council to give you the opportunity to talk about these matters before they become a problem. Dealing with these situations at the time are always likely to result in sub-optimal decisions because the likely impact is going to be compromising between various parties.

For a confidential discussion about the issues raised please email Stephen.Cowburn@lgba.co.uk or call Stephen on 07974 425 361. He provides bespoke workshops for family businesses in creating family constitutions and family councils and provides 1-1 coaching to parties involved in typical family challenges.

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