Many families sell their family business at the end of a long journey. As the business grows from a small operation, it can create a large commercial empire for many generations. As the business is sold, the wealth can be converted into cash, investment and assets. However, there will be implications of changing the nature of the family's financial obligations.
While much will be focused on the price negotiation and due diligence, it's important to think about how the wealth will be structured post-sale. Many families will be left with a large amount of liquid wealth that they will need to manage.
Who will own the wealth? How will it be managed? Which Jurisdictions will the wealth be held in? How will family members benefit from the wealth? Who will have control over the wealth when the current generation is no longer able to?
Families with interests and connections in different countries will need to carefully consider how best they can structure the wealth. This should be planned alongside an exit strategy that considers how best to structure the family's wealth to consider their business, legal obligations and long term goals.
Firstly, Consider the Sale Structure
Before even looking at where to invest the wealth, the family should consider the implications of the sale. The family could be selling shares in the business, specific business assets or selling everything including through a holding company. Different types of sales will have different tax and legal implications.
When selling shares, the buyer will have full ownership of the company and its history. The seller will likely receive the wealth from share sales. Whereas, when selling assets, specific business assets will be transferred. This may mean that you need to consider how contracts, staff, licenses, IP and obligations are handled. This could impact on how much you actually receive.
Consider whether you will receive payment for the full amount of the sale at the point of sale or if there is any deferred payments. This could mean that the wealth isn't as liquid as the headline price suggests. You may have to consider how much you will receive due to escrow, warranties, indemnities and potential claims post-sale.
Carefully consider how the wealth will be structured. Ensure you know who owns the shares/assets, any outstanding shareholder loans, guarantees, intercompany balances and any encumbrances. If there are multiple family members that own the wealth, you should ensure the wealth is distributed in line with documented legal rights.
Isolate the Wealth
One of the most important things to consider post-sale is isolating the wealth. If the family still have significant investments, guarantees or management roles within the buying company, they may still be exposed to commercial risk.
You should consider isolating the wealth. This may mean investing into individual investment accounts, holding company, family investment vehicle or wealth management structure. This will depend on what you have, how many people need to benefit from the wealth, where the family resides and where they want to invest.
A holding company can provide a central place for holding shares in other companies, property and investment companies. This can make administration, reporting and ownership easier. However, creating a company does not automatically provide any protection or tax benefits. This depends on the jurisdiction, ownership, activities, tax rules and how the wealth is managed.
Don't try and put all your assets into one entity just for ease of administration. You may have a property portfolio, operating investment, liquid assets and assets that will go to the next generation. These may need to be separated to reduce risk and make ownership and succession easier.
Personal Ownership, Company or Foundation?
How you structure the wealth will depend on what you want to achieve. If you have a simpler wealth, fewer people wanting to benefit and want to maintain control then personal ownership may be enough. This can also make it easier to withdraw the wealth. However, you will still need to consider succession.
If you want to invest a large amount of the wealth, purchase businesses or have a well-diversified portfolio then a company may be the best solution. This can provide rules on how decisions are made, who can manage and how ownership can be transferred.
Foundations and trusts can help separate legal ownership/control from economic interest. A foundation is generally a legal entity that will have a charter and rules on how it will be run. A trust will involve the settlor putting assets under control of a trustee for the beneficiaries or specific purposes. The exact legal aspects will depend on the governing jurisdiction.
This can be very useful if you want the founder to play a specific role in setting long term goals for the family but also ensure that the next generation benefit from the wealth. This can be done by having conditions on how much they can receive. This could be tied to education, healthcare, maintenance or other legitimate purposes for the family. If the beneficiary is young, inexperienced with money or not expected to manage large investments then this can also provide continuity.
However, don't assume that a foundation or trust will protect you from creditors, tax authorities or legitimate claims. If the wealth is transferred to try and avoid existing creditors, hide the beneficial owners or avoid legal obligations then this can be challenged. Ensure that the foundation/trust is set up properly and genuinely run.
UAE
Families based in the UAE will have a number of options to consider. The introduction of Federal Decree-Law No. 37 of 2022 relating to family businesses has created a framework for family ownership, management and succession. Eligible family businesses can structure ownership, management and family governance.
While this is aimed at family businesses, the management principles can still be applied. By setting up a family charter, clearly defining who makes decisions and documenting how disputes will be resolved can help avoid any disagreements impacting your investments.
The Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) also provide frameworks for foundations, trusts and other wealth management structures.
When deciding which option to use you need to consider more than just the cost of setting up a company. You need to consider the governing law, regulatory requirements, reporting, how the beneficiaries will be treated, availability of professional trustees/council and where disputes can be resolved. If you set up the structure in one financial centre you may also have assets in other jurisdictions.
You also need to consider the UAE corporate tax framework. The Federal Tax Authority have provided guidance on how family wealth management structures, including family foundations, will be taxed. This will depend on the legal structure, activities and if they qualify. You shouldn't assume that a foundation will automatically be exempt from corporate tax.
Even though there is no personal income tax in the UAE, you may still be exposed to tax in the countries where the family members reside or where investments are held. You will need to consider how capital gains, dividends, rental income, inheritance and distributions are taxed in line with the relevant domestic laws and double taxation agreements.
Managing International Investments
Families rarely have all their wealth in one country. After selling the business you may want to invest into commercial property in the UAE, listed investments internationally, purchase businesses in India or Europe or hold financial assets through institutions.
This can help to diversify your investments but can mean you have obligations in multiple jurisdictions. Where the asset is held, who owns it, where decisions are made and who the ultimate beneficial owner will influence the rules.
Consider tax residency. If family members move between countries they may have obligations in multiple jurisdictions. Just because they have a residence visa or bank account doesn't mean they are resident. Domestic legislation may look at physical presence, permanent home, centre of personal and economic interest and other statutory requirements.
Ownership across borders can also cause issues with withholding tax, inheritance tax, capital gains and reporting requirements. Using an offshore holding company or foreign foundation does not mean you won't have any obligations. Tax authorities may look at the substance of the arrangement, commercial purpose and who ultimately controls/benefits.
Ensure you have coordinated advice from professionals in the relevant jurisdictions. If you are transferring funds you may find that whilst the structure is efficient in the UAE, you may get unexpected results in another country.
Investment Strategy
Once you've decided on the legal structure you should consider your investment strategy. After a successful sale you may be tempted to invest into opportunities that will provide similar growth. However, this can expose you to risks that you may not understand.
Split the wealth into how you want to use it. Some should be kept in liquid assets to cover any immediate needs of the family, tax, professional fees and any potential liabilities. Some should be invested for the longer term into equities, bonds, property, private equity and other suitable assets.
Consider how long you want to invest. If the wealth is going to be used to support the current generation it may be best to have a different strategy. If it is going to be invested for 20-30 years then younger family members may have more tolerance for market fluctuations. Older family members may want income, capital protection and liquidity.
Ensure you don't put all your wealth into one asset class. Putting all your sale into property, one stock market or one currency can expose you to significant risk. Consider geographical risk, currency movements, liquidity requirements and how much risk the family is willing to take.
Having an investment policy document can help. This should include what the family want to achieve, how much risk they are willing to take, any limitations, liquidity requirements and who has authority. Having regular reviews can help ensure that decisions are in line with the family's financial position.
Family Office
If you have significant wealth and investments across different jurisdictions then a family office may be a good option. This can help to centralise your investment management, accounting, tax compliance, legal, estate planning and reporting.
You don't necessarily need a large independent office. Smaller families may use a virtual or outsourced family office. Specialist professionals can be appointed to manage different areas.
The key thing to consider is who has authority to make investment decisions, approve major transactions, distribute funds and appoint professionals. Whilst the founder may want to have oversight, this should not be purely dependent on personal relationships.
A family council can be used to discuss financial matters, succession, philanthropy and disputes. A family constitution or charter can be used to document common values, expectations and how to resolve disagreements. Whilst they may not automatically have the same effect as a company's constitutional documents or trust, they can provide a good foundation.
It is important to consider that whilst the family may own the wealth, they may not want to manage it. If the next generation have different interests then you may want to ensure that whilst they have a right to benefit from the wealth they may not be qualified. Using independent investment managers and clear reporting can help ensure professional standards are maintained.
Succession Planning
Even after the sale of the business you will still need to consider succession planning. In many cases this will be more important as the family will now have a number of financial and physical assets rather than one business.
Without proper planning in place, you may find that if a key family member passes away or becomes incapacitated there may be uncertainty around who can access the accounts, make investment decisions, own the assets and how the wealth will be distributed. There may also be disputes between the heirs. This may cause delays in transferring the assets especially if family members reside in different countries.
Consider wills, trusts, foundations and other succession documents. This will depend on the family's domicile, nationality, religion, where assets are held and personal status/inheritance laws. In the UAE this can depend on the individual and the jurisdiction.
A will may not cover everything. Consider how the ownership, shareholders, beneficiaries, power of attorney and any foundation/trust governing documents will impact. If the family have assets in multiple countries then consider if separate estate planning documents are required and if they will be consistent.
The aim is to plan how the wealth will be managed, who will have control, how dependants will be supported and how any disputes can be avoided.
Protecting the Family Wealth
Many founders will have had a strong relationship with the business. It may have provided employment, professional identity and something the family can all relate too. Moving to managing financial assets can be challenging especially if the next generation have different expectations of how they want to spend, invest and take on risk.
Some families will want to invest some of the wealth into new ventures so that the next generation can have their own commercial interests. Others may set up foundations, education funds or structured charitable initiatives. This can help to provide continuity and give the family a wider role.
Whatever you decide, ensure the plans are realistic and sustainable. Consider how you will distribute the wealth between the beneficiaries. Too much being withdrawn, poor investment decisions and family disputes can cause the wealth to slowly be lost. This could have taken decades to build.
Having regular independent reviews of your investment, tax, governance and succession documents are crucial. As circumstances change you may need to update the original plans.
Long Term Wealth Plan
The sale of a family business shouldn't be seen as the end of the family's financial journey. It should be seen as the beginning of a new chapter. Ensuring wealth is protected, invested and succession planning is more important.
Rarely will the best solutions be just one company, foundation or trust. It will be a combination of the right ownership structure, legally sound documentation, tax planning, diverse investments and clear family governance.
Families based in the UAE or with international investments have a lot of flexibility with the available legal structures. However, careful consideration needs to be given to ownership, tax residency, inheritance, regulatory requirements and long term goals.
Ultimately the success of the sale shouldn't just be measured by how much you received from the buyer. It should be measured by how well you can protect, manage and pass on the wealth to the next generation without causing unnecessary disputes. By carefully planning how you want to structure your wealth, like you did with the business, you have a better chance of making your successful exit a lasting legacy.
Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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