Succession planning for Family Trading Company alongside a FIC

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We recently looked at Family Investment Companies (FICs), their increasing popularity and the considerations that need to be made for an arrangement to span across three generations. This week, we take a look at how an FIC may fit alongside an FTC where wealth planning isn't just about forming an FIC so much as managing succession. 

While FICs are typically used to build wealth in the hands of the next generation, the reality is often that the family’s wealth arises from a family trading company (FTC) or group which may have been formed by the grandparents or their predecessors. So the wealth planning is not just about forming an FIC so much as managing succession.

There substantial scope for the ownership, structure and operations of the FTC to be amended to fit the needs of future generations. There is no one-size-fits-all approach and much will depend on the family dynamics, whether the next generation is willing and capable of taking the business forward and the size and nature of the business itself.

In the diagram above, we have assumed the grandparents are the majority shareholders in a trading company and would like to pass control and ownership to the next generation. In advising on this, many of the points relevant to an FIC would also apply here as well as certain new dynamics Our points for discussion would include the following:

• It would be possible to create classes of share to allow for income and rights to capital to be distributed to different family members.

• The business could be divided or structured to allow different family members to own or develop the business, or for start-up projects to be launched by younger family members; it is not essential that everyone owns an equal share and it may be appropriate to reward those who ultimately drive the FTC forward.

• Equally, if no successors are identified within the business, it is entirely possible to bring in an outside managing director or management team yet structure balanced ownership that fairly protects the wider family’s interests with the management’s desire to develop the business.

• Ultimate control could be given to the senior family members – grandparents and parents – through voting, veto and other control rights. There is a balance here; once control has passed, the former leaders should act as wise counsel to guide the next generation; if they have excessive control (and they may not wish to give this up easily), it may not help the new leaders transition into the new role.

• Provisions to ensure the share capital remained in the family would apply as with an FIC, to ensure the value remained in the family in the event of death, divorce, bankruptcy etc.

• If appropriate, a ‘family charter’ espousing the family’s values could be incorporated to provide constitutional guidance (rather than a legal role)

• Early planning, pro-active changes and consultation are all hall-marks of a successful generational succession. Plans can be put in place early and refined and adjusted to accommodate change along the way.

Although any detailed consideration of succession strategies is beyond the scope of this note, we hope it will help initiate the long-term process and thinking that is essential to transition a successful family trading company from one generation to the next.

Please do get in contact if there is anything raised in this article that you would like to discuss.