Building a family business and passing it on to your children can be enormously rewarding. But family businesses present particular ownership and management challenges. Planning ahead and involving family members is essential if you are to achieve your objectives, make the most of your family strengths and minimise the risk of disputes.
Retaining family ownership and control is a prime objective for many family businesses, but may limit growth potential. The family owned business should be open to bringing in outside shareholders if additional investment is needed. If required, investments can be structured so as to ensure that family control is retained.
Passing the family business on to the next generation can be very challenging and disruptive. From a personal perspective, you will want to ensure that you are treating your children fairly, perhaps including both children who work in the family business and those who do not. At the same time, you need to protect your own interests, perhaps withdrawing funds from the business to finance your retirement.
Tax efficiency is typically a major concern, particularly in terms of potential inheritance tax liabilities. As with other tax matters, forward planning is essential.
Many family businesses are not just family-owned but also family-run. Using family members as employees and directors has many advantages, including high levels of commitment, a sense of continuity and shared values, and a long-term perspective.
But family-run businesses can become inward-looking or complacent. Non-family employees may legitimately resent discrimination in favour of family members. Even where you have identified the need to bring in new talent, it can be difficult to attract and retain outsiders concerned at the family’s influence.
Again, the family business faces a particular challenge as control passes to the next generation. Will you be able to stand back from the business or will you undermine your successor? What happens if none of your children wants to run the business – or several of them do? Succession planning is vital.
In the family business, business disputes can quickly become personal – and personal disputes can impact the business. Unforeseen events such as a divorce can have a dramatic impact on family ownership.
While building a family business can secure the family’s financial future, it can also bring an unacceptable degree of financial risk. These risks can be particularly acute when personal financial assets are concentrated in the family-owned business or you have given personal guarantees for business debts.
Careful planning allows you to identify and address potential problems in advance. Options include an appropriate shareholders agreement, clauses in the company’s articles of association and the use of a family trust to hold shares. Above all, open communication can help the family resolve any issues and allow the family business to prosper.