The recent Court of Appeal decision in Davies v Davies highlights the importance of agreeing and managing the expectations of the next generation of the family business as part of wider succession planning.
Eirian Davies worked on her parents' dairy farm for nearly 30 years. Her parents assured her that she would one day have the farm, become a partner in the dairy business and live in the farmhouse for the rest of her life. She received a basic wage for her work on the farm but was paid less than the going rate.
Sadly in 2012 the family relationship broke down and Ms Davies' parents sought to evict her from the farm.
On appeal, the Court of Appeal confirmed that the courts can intervene where a person has relied to their detriment on assurances made to them in respect of property.
In this case the Court did not compel Ms Davies' parents to give her the farm because she had not worked on the farm for her whole life and her parents had built up the farm and still wanted to work on it. The Court also decided against granting Ms Davies a reversionary interest in the farm after her parents' death as it considered this would simply not be practicable given the irreparable breakdown of the family relationship.
Instead, the Court decided that Ms Davies should be awarded a financial sum which truly reflected the detriment she had suffered. Taking into account a number of factors, including the value of the farm, the Court awarded Ms Davies the sum of £1.3 million.
The courts have a wide discretion when deciding upon an appropriate award in these kinds of claims.
In order to avoid any uncertainty (and the significant costs involved in any subsequent litigation) family business owners should involve the next generation in their succession planning at the outset and seek to agree a way forward.
Family businesses may understandably be reluctant to have these conversations and, if this subject is particularly sensitive, it may be helpful to enlist the support of an experienced family business consultant.
A thorough and frank succession planning process that involves both the outgoing and incoming generations ensures that the family has a shared vision for the business which matches expectations and allows them to focus on growing and developing the family business for the benefit of all involved.