Evaluating Family Business Debt

Evaluating Family Business Debt

Family-run businesses blend the strength of familial bonds with the dynamism of entrepreneurship, and with over 5 million firms operating in the UK, they are an integral part of the economy. However, the unique nature of these enterprises calls for specialised legal considerations to ensure their longevity and success.

In our latest blog series, members of our Family Business Unit explore navigating the changes and challenges inevitably faced by family firms, and how best to turn them into opportunities.

Evaluating Family Business Debt: A Guide for Scottish Entrepreneurs

For many entrepreneurs in Scotland, family businesses represent not only a source of pride but also a significant investment of time, effort, and resources. However, when family business debt accumulates, it can become a source of stress and uncertainty. You may feel a sense of loyalty to the client who owes the money. You may have traded with that person or business for years. In such situations, it’s essential to assess whether pursuing the debt is worth the effort. In this guide, we’ll explore key considerations to help you make informed decisions about handling family business debt in Scotland.

Understanding the Debt

Before deciding whether to pursue family business debt, it’s crucial to gain a clear understanding of the debt itself. Start by reviewing all relevant documentation, including loan agreements, contracts, and invoices. Identify the amount owed, the terms of repayment, and any collateral or security associated with the debt. Additionally, consider whether the debt is overdue and if any interest or penalties (such as late payment charges) have accrued.

Assessing the Viability

Once you have a clear picture of the debt, assess its viability by considering various factors. Evaluate the financial health of the client who must repay the debt, including where possible their cash flow, profitability, and liquidity. Determine whether they have the capacity to repay the debt within a reasonable timeframe without compromising its operations or long-term sustainability. If the debt is substantial or significantly exceeds THEIR financial resources, you may require to be a bit more aggressive in your collection efforts.

Exploring Alternatives

Before pursuing legal action to recover family business debt, explore alternative solutions that may be more cost-effective and less adversarial. For example, consider negotiating with the creditor to establish a repayment plan or explore debt restructuring options. In some cases, creditors may be willing to settle the debt for a reduced amount or extend the repayment period to avoid litigation. Collaborative approaches can often result in mutually beneficial outcomes while preserving relationships with creditors.

Seeking Legal Advice

If negotiations prove unsuccessful or if the debt cannot be resolved amicably, consider seeking legal advice from a solicitor experienced in debt recovery and commercial law. A solicitor can assess the legal merits of your case, advise you on your rights and obligations, and represent your interests in legal proceedings if necessary. Additionally, a solicitor can help you understand the legal remedies available under Scottish law for enforcing debt recovery, such as court orders, asset seizure, or insolvency proceedings.

Considering the Costs

Before pursuing family business debt through legal channels, carefully consider the potential costs involved, including legal fees, court costs, and the time and resources required to pursue the debt. Compare these costs against the amount of debt owed and weigh the potential outcomes of legal action. In most cases though, especially if you are seeking payment of a debt from a business (ie not a consumer), the majority if not all of the legal costs ought to be recoverable from the non-paying client.

Making an Informed Decision

Ultimately, the decision to pursue family business debt in Scotland should be based on a careful assessment of the debt’s viability, the financial health of your business, and the potential costs and benefits of legal action. Consider consulting with financial and legal professionals to explore all available options and make an informed decision that aligns with your business objectives and priorities.

Dealing with family business debt can be challenging, but by carefully evaluating the debt, exploring alternative solutions, seeking professional advice, and considering the costs involved, you can make informed decisions about the best course of action for your business. Remember to prioritize open communication with debtors and approach debt resolution with a proactive and solution-oriented mindset. With careful planning and strategic decision-making, you can effectively manage debt due to your business and protect the long-term success of your business in Scotland.

We look forward to welcoming you to future events as we continue to build a community of like-minded individuals passionate about family-run businesses.
Our next FBU event will take place in Edinburgh on the 23rd May 2024.
If you would like to attend please let us know by registering your interest here.
David Alexander
Partner, Head of Debt Recovery
Email:  dalexander@gilsongray.co.uk

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