Introduction: Ten points to consider during this, and any other, crisis period
As we all adapt to this unprecedented climate and consider how to best support our clients through the process, the STEP Business Families Special Interest Group (SIG) has developed this reference guide for STEP Members containing operational, governance, tax and succession points of consideration for discussion with business family clients to help mitigate the impact of COVID-19.
(Please note that the purpose of this reference guide is for guidance only; please do not base any legal reliance thereon).
1. Liquidity and cash check
- Are you facing liquidity and cash management issues?1
- Are the expectations of shareholders and beneficiaries being managed around dividend cuts and reduced or delayed distributions to reflect reduced cash-flow and business profitability?
2. Leadership thoughts
- Do you have the right company leader(s)? Given the need to innovate, might this be the right time to transition to, or train, the next generation or third-party professional managers with fresh ideas and talent.2 How is this best managed?
- How is the experience of the senior generation best utilized and communicated – do they need to remain in their stewardship role longer than anticipated? Has consideration been given to measures to encourage them to start to cede control?
3. Legal documents
- Are the business corporate documents, family wills and the constitutional documents behind the share ownership structure (e.g. trust deed and letter of wishes) up to date and do they reflect the ownership, governance, and succession intentions?
- Do the wills, memorandum and articles of association, shareholders agreements, family constitution, trust deed and banking mandates need updating to ensure a smooth transition should something happen to key family members?3
- Is it clear where the shares and voting control will go in the event of incapacity or death?
4. Tax compliance
- Have you thought about accelerating restructuring and wealth transfer plans to take advantage of lower values and, where relevant, low tax rates? The direction of travel seems that tax rates will likely rise in the coming years to pay for the COVID-19 virus suppression efforts.
- From a UK perspective, capital gains tax rates are historically low and the Office of Tax Simplification (OTS) has recently announced a review of capital gains tax, probably resulting in an increase in rates. Although the lifetime limit on Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) has been reduced from GBP10 million to GBP1 million, with advance planning it can provide a significant capital gains tax saving.
- Further, from a UK perspective, a review of business property relief (for UK inheritance tax purposes) might be timely. BPR can exempt shares in unquoted trading companies from UK inheritance tax, but too much cash can prejudice the chance of qualifying. Cash in the business needs to be kept under careful review, with evidence that it is required for the purposes of the business.4 Inheritance tax has also been under review in the UK, and BPR is threatened with withdrawal, which would make gifting shares and death transition prohibitively expensive.
- Have you considered realising tax losses while values are lower, to set against gains in the future?
5. Individual owners, directors, employees
- Have individual business owners, directors and employees checked their residence, immigration and domicile positions if they are being or will be relocated or have simply found themselves unexpectedly spending more time than planned in a jurisdiction due to borders having been closed. Whilst exceptional circumstances might apply, residence and domicile planning is a complex area requiring specialist advice.
6. Compliance check
- Is the family and business tax and regulatory compliance up to date and internal policies reflective of this? There have been changes to filing deadlines and some automatic tax payment date deferrals. Also in a number of jurisdictions, tax residency criteria have been relaxed as a result of the restrictions on travel and the inability to leave before crossing a ‘days in’ threshold. Are any economic substance provisions being complied with?
7. The Business Model: crisis management, continuity and strategy reflection
- How have your crisis management and continuity plans and protocols worked?5 Are they being continually reviewed and are they documented? Strategically, do any changes to the business model need to be made or is it to remain unchanged? Have you considered a merger or acquisition, or divestment of part of the business? Have you considered whether the next generation should be more involved to ensure continuity in all circumstances?
8. The Operational Model: crisis management, continuity and strategy reflection
- Are your resources being put to optimal use? Is outside investment necessary or desirable from a diversification of risk perspective?6
- Are you able to fulfil your contractual obligations? If not, what are your options?7
- What about planning around employees returning to work and workplace, and ensuring they can be confident of a safe workplace?8
- With particular reference to people working from home, how are you dealing with cybersecurity?
9. Governance review
- Do you have family and business governance principles and processes integrated in the business and succession structuring and operation? These are key to ensuring the right powers rest with the right people and there are clear succession mechanisms. They also provide a solid foundation for the business and decision making arguably allowing it to be more dynamic. Having a clear purpose and values can help with major decision making?9
- Do these governance procedures remain fit for purpose? Are any changes necessary or desirable?10
- Have you considered life assurance, key man cover and incapacity measures to deal with future crises?
- Have the lines of communication (internally, externally and with and within the family) been effective? How can they be improved?
- How is technology supporting and housing your governance and communication lines and can this be more efficiently deployed?11
10. Final overall risk management check
- Are you proactively reviewing and anticipating all of your risks in this constantly moving environment, where different risks appear all the time, including cyber security12 and reputational risk? Have they got an expert to whom to talk in the event of a reputational emergency? How are businesses and families doing all of this whilst maintaining and enhancing their social, environmental, and general sustainability objectives?
There are some helpful STEP articles and insights:
- STEP Journal, June 2020: Insight panel: How have you and your clients reacted and adapted to the global pandemic?
- STEP Journal, June 2020: Navigating troubled waters
- STEP Journal, May 2020: Don't wait until crisis strikes
- STEP Journal, April 2020: Family fortunes
- STEP Journal, March 2020: The modern family office
- STEP Journal, November 2019: Family values
- STEP Journal, March 2019: Ability, agility and adaption
- STEP Journal, April 2014: Weathering the storm
- STEP Journal, August 2019: Book Review: Family Offices: The STEP Handbook for Advisers, second edition
- STEP Webinar: Family businesses, reputational risk and brand protection
- Book: Family Offices: The STEP Handbook for Advisers (second edition, May 2019)
- Book: The STEP Handbook for Advisers: Business Families and Family Businesses (2nd Edition) 2018
There is useful information to be found on government websites:
There are some interesting articles and support pages on a number of family business websites globally:
- Family Firm Institute website (including in the FFI Practitioner online journal):
- The Institute for Family Business:
The Big Four accountancy firms have regular COVID-19 webinars and some good resources on their websites:
- Deloitte highlights industry perspectives:
Articles can be found on some of the management consulting companies as well:
- McKinsey has a dedicated insights webpage:
For further business families-related guidance, please contact the Business Families SIG Committee
COVID-19 Stories (see 'Partner Voices' section)
- 10www.step.org/step-journal/step-journal-october-2019/5-steps-successful-succession; www.step.org/step-journal/step-journal-october-2019/change-top
- 11www.forsters.co.uk/news/blog/family-governance-digital-age-post-covid-pandemic-world; www.pinsentmasons.com/out-law/guides/e-signatures-england-wales; www.lawsociety.org.uk/topics/coronavirus/our-position-on-the-use-of-virtual-execution-and-e-signature-during-the-coronavirus-covid19-pandemic
- 12www.step.org/step-journal-plus/step-journal/under-cyber-attack; www.ey.com/en_gl/family-enterprise/what-cybersecurity-risks-family-enterprises-and-offices-face-during-covid-19