Family succession planning is very common. Frequently, retiring company directors appoint their children as directors in their place. This can go terribly wrong if not done correctly. Have a look at this sorry tale:
Twenty-three years ago, a family company director was retiring and he appointed his son as director in his place. The same procedure was adopted by the director’s son when the grandson became a director 3 years ago.
The company’s shares were transferred from the son to the grandson and the grandson’s father had the comfort of knowing that the business had successfully passed to the third generation.
The father had kept trading the company as it was left to him 23 years ago. His son on the other hand had concluded that the company should upgrade with the newest and best machinery available. He proceeded with the upgrade – all acquired with borrowed money. The company could not manage the additional financial burden and ended up in liquidation earlier this year.
The problem for the family did not end there. The father’s comfortable retirement was halted abruptly. It was not just the embarrassment he felt with his friends and relatives over his son’s failed attempt at running the company. Neither the son nor the father had advised the company’s suppliers of the change in directorship, and numerous company creditors held personal guarantees from the father. What’s more, there were even older suppliers still holding personal guarantees of the grandfather. The upshot was that the father and the grandfather (in his 90’s), being the two retired directors, were being pursued under personal guarantees for company debts that they had no control over!
Three generations of family assets were wiped out because when the father became a director 23 years ago, suppliers were not asked to complete new credit applications and update the personal guarantees from the grandfather to the father and the same error occurred when the father’s son became a director 3 years ago.
This oversight can also take place when a business owner changes from being a sole trader or a partnership, to a company structure.