Preventing problems in a family business

Running a family business brings additional challenges and opportunities. But the law can help to reduce risk of things going wrong and help to create a bright future for you, your family and business

The key to running a family business successfully is to agree in advance key issues with family and other stakeholders. Everyone should understand how the interests of the business and the family relate. Everyone's opinion should be listened to. And all should understand their role in making the business a success.

The business environment changes rapidly, while family members' wishes, needs and circumstances can change too, so it's an ongoing process. So, what does it involve?

1. Identify stakeholders

These are the people whose interests and views you need to consider. They can include:

  • Family members employed in the business or with a stake (they may own shares or have lent money to the business).
  • Family members not personally involved in the business, but eager to protect the interests of those who are. Usually they are spouses, sons, daughters or parents.
  • Wider influential family members.
  • Non-family employees and shareholders.
  • Lenders.

2. Communicate the strategy

Stakeholders should understand the business' strategy and how it can deliver success. Discuss the necessary structure and decision-making processes, as well as management style, shared values and culture, etc. Communicate your vision ? the business you want to create.

Consider holding a regular family meeting. At an annual family forum, discuss personal, business and family aspirations and how they fit with the business. Create a family charter to which family members can refer.

Communicate with non-family employees and shareholders. Involve in key discussions employees who you want to take over running the business when you retire. Ask employees for a 'workforce perspective'. Regular written updates or face-to-face meetings with key shareholders can prove valuable.

3. Address ownership and management issues

Discuss the current ownership and management structure and how you see it developing. Sometimes it can be beneficial to split ownership into separate businesses or set up trusts/family investment companies for commercial, tax and succession purposes.

Balance your wish to retain control and receive decent dividends against other family members' wishes to have more shares, votes and dividends. If you want to issue shares to non-family employees or seek external investment, explain why and when. Take advice on different share rights for different family members, other employees or outside investors.

Agree what will happen to shares if a family member wants to leave the business, becomes ill or dies. If a family member divorces and their spouse holds shares, does the family want to get them back? Agree who will take over when you retire or if you're suddenly unable to work or die.

If you are aiming for family succession (or mixed family/non-family succession), plan and agree your approach with family and key employees. Consider the possibility that family members may not have what it takes to run a business or may not wish to. Successors may have a different management style, so plan for a gradual handover to reduce impact. A successful handover can take many years.

Make it clear if you would be willing to sell the business to a third party if the right offer came along or go public. Take advice on the tax implications.

4. Ensure fair recruitment

Agree a fair approach to recruiting family members. Don't create jobs for family members that shouldn't exist. Don't only recruit family members to certain jobs, even if they're qualified. Encourage competition, so family members aren't appointed unless they are the best candidate.

Once recruited, explain to employees what will be rewarded and earn promotion. Make it clear if, for example, a younger family member can leapfrog more senior family members, or non-family members could get larger pay rises than family members. Use a respected third party (eg HR consultant) to appraise senior management, including senior family members.

If family members aren't up to the job, act quickly, to avoid resentment. Make it clear that family members may be demoted, dismissed or made redundant, like any other employee.

When discussing salaries, keep unearned income the family member receives from dividends out of the equation. The reward for doing the job should stand alone.

5. Think about funding

If the business needs funding, don't ask family members to over-commit. Family wealth (including yours) should be spread across different investments (take sound independent financial advice). Consider security for any loans from family, so they are protected if problems arise.

Pensions can be a valuable and tax-efficient way of keeping employed family members happy and in certain circumstances assets in a pension can be made available to the business. Take professional advice on the options.

Consider a dividend policy so family and non-family shareholders know what dividend they can expect if things go well, but allow flexibility.

6. Provide for change and disputes

New, younger family employees may want to change things. Agree how ideas for change will be raised and assessed.

Also agree how disputes will be resolved. Options include: mentors (ie trusted outsiders); independent professional advisors; independent mediators who can 'broker' agreement; or arbitrators, who you agree can impose a solution if you can't agree among yourselves.

Take independent, expert, professional advice on the key issues. For legal issues, consider:

  • A shareholders' agreement.
  • Amendments to your company's articles to suit your circumstances.
  • Non-executives on the board, for impartial advice and experience.
  • Mentors.
  • Access to a mediator to resolve disputes.
  • Employment and consultancy agreements.

First-hand experience

Chris Barling is Chairman of ecommerce software supplier SellerDeck. He started his business back in 1996. He shares his experiences.

"My decision to start a new business was made jointly with my wife. Although she's had limited involvement in the management, she was a full participant in the original decision. And as a result, she has supported me in every up and down since then, which has been a real help. Similarly, my sister and a friend both lent me money when we had an early cash flow crisis. They wouldn't have done this if they hadn't been taken on the journey beforehand.

"And that's the rub. If people close to you aren't with you, they may be a source of discouragement. In the extreme, broken relationships can greatly increase the chance of business failure. I've actually seen this with a friend, where they ultimately ended up with nothing. On the other hand, constant encouragement and reassurance can be a real help ? as can financial support.

"If you start a business, it won't only affect you, it will impact those close to you as well. They deserve to be told what that will involve and to be consulted for their opinions. Do this, and you will increase your chances of success significantly."

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