Family-run businesses

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A family-run business is typically one in which more than half the shares are controlled by members of the same family or one that has been passed between generations.

Starting, leading and working in a family business can bring valuable benefits compared with other businesses — from greater trust between staff to increased flexibility. However, without careful management, there can also be problems — from family members lacking critical skills, poor communication to clashes over pay.

This guide sets out the main advantages that come with running a family business. It also looks at some of the key challenges and suggests ways these can be channelled to become positive forces for business growth and success.

Advantages of family businesses

If you start or join a family business you’re likely to benefit from a range of advantages which you often don’t find in other enterprises. These include:

• Common values — you and your family are likely to share the same ethos and beliefs on how things should be done. This will give you an extra sense of purpose and pride — and a competitive edge for your business.
• Strong commitment — building a lasting family enterprise means you’re more likely to put in the extra hours and effort needed to make it a success. Your family is more likely to understand that you need to take a more flexible approach to your working hours.
• Loyalty — strong personal bonds mean you and family members are likely to stick together in hard times and show the determination needed for business success.
• Stability — knowing you’re building for future generations encourages the long-term thinking needed for growth and success — though it can also produce a potentially damaging inability to react to change.
• Decreased costs — family members may be more willing to make financial sacrifices for the sake of the business. For example, accepting lower pay than they would get elsewhere to help the business in the longer term, or deferring wages during a cashflow crisis. You may also find you don’t need employers’ liability insurance if you only employ close family members.

Key things to consider when setting up a family business

Setting up a family business can be an exciting challenge. Before you go ahead it’s important to consider how you’ll deal with a number of issues that commonly confront such ventures. Think about how:

• the business’ shares will be allocated between family members and if there will be non-family shareholders
• to ensure business decisions are taken for business reasons, rather than personal ones
• the roles and responsibilities will differ between family shareholders who are active in the business, those who aren’t, and outside shareholders
• to reward family members, whether it will be different to remuneration for non-family members and what problems this could cause
• you will cope with conflict when it arises
• to communicate with your family when you are also their boss
• to avoid resentment when deciding who will succeed you
• to ensure that the family’s finances aren’t entirely dependent on the business

Communication and family businesses

Many misunderstandings and potential areas for dispute in family businesses can be avoided if you ensure good communication channels are in place.

The risks are that:

• family members assume they know what other family members feel or want
• personal ties inhibit honest opinions being expressed
• the head of the family may automatically assume control of the business even if they don’t have the best business skills
• one family member ends up dominating the business
• family-member shareholders not active in the business fail to understand the objectives of those who are active and vice versa
• personal resentments become business resentments, and vice versa
• non-family board or management members feel excluded

To avoid these pitfalls, you should foster an atmosphere in which open discussion and communications are welcomed and concerns can be voiced without blame being cast.

There are a number of practical things you can do. You might:

• remove personal issues from business discussions by holding all meetings in a work environment, rather than a home environment
• create mechanisms for providing constructive feedback — this can help prevent staff, particularly non-family employees, from feeling demotivated and uninvolved
• arrange occasional away days to discuss the business’ strategy and direction
• appoint a non-executive director to the board, or establish an advisory board to provide an impartial viewpoint and help prevent emotions from clouding business decisions
• establish a family constitution creating policies that will guide the family’s relationship with the business

Managing conflict in family businesses

The potential for conflict in family businesses can be greater than for other businesses — typically due to a clash between commercial and emotional concerns.

However, conflict can be seen as a challenge — or even as a positive driver for change. For example, a disagreement between family members on the strategic direction of your business may result in a much-needed rethinking of your business plan and a new agreed vision for the business.

Such outcomes, though, are only possible if techniques for avoiding, managing and resolving disputes have already been instituted.

Ways to avoid conflict

Think about how people in your family business communicate with each other. Are emotional issues kept separate from business discussions? Are mechanisms in place to allow all employees — not just family members — to contribute their views? Or does one person tend to dominate?

The best way of avoiding conflict is to prevent misunderstandings from happening in the first place. Drawing up a family constitution can help you achieve this.

Plan how you’ll deal with conflict and disagreements and set this out in the family business constitution.

Holding a meeting of the business’ management may be appropriate for addressing relatively minor disputes.

For more serious matters you may want to involve an independent third party — many family businesses benefit from having a non-executive director or business adviser — to act as an impartial mediator.

Pay and benefits for family members

Remuneration needn’t be a thorny issue. The goal is to have a remuneration strategy which is consistent, fair and open.

Resentment and conflict tend to occur when these three attributes are missing — for example if family staff members are paid more than non-family employees without good reason.

Family members who hold shares but who aren’t active in the business may also question the remuneration of those who are.

Develop a remuneration strategy

• An individual’s pay should be based on their value rather than their personal need. Look at what the market rate is for the job.
• Family members shouldn’t be lured into the business with inflated salaries. Likewise, they shouldn’t need to endure unreasonably small salaries to prove their loyalty.
• Benefits, bonuses and incentives should be based on set criteria.
• Unreasonably high salaries and phantom jobs shouldn’t be used to transfer tax-deductible wealth to family members.
• Post-retirement remuneration plans should be agreed before they come into play.
• Non-family employees doing the same work as family members should receive the same remuneration.

It’s important that your remuneration policy is seen to be fair and objective. Write it down, be open about it and review it regularly.

Advice from an outsider — an HR consultant, for example — can be invaluable in avoiding remuneration disputes.

Draw up a family-business constitution

One way to successfully manage conflict in a family business is to have a family-business constitution. When well drawn-up, such a document can even prevent conflict occurring in the first place.

A family-business constitution — sometimes known as a family charter — is partly a statement of general principles. It outlines your business’ core values and vision, and your family’s commitment to them.

Importantly, it is also a practical guide for running the business and a framework you can use to deal with family business issues that have the potential to cause disputes.

The process of drawing up a family constitution should be collaborative, involving everybody with a stake in the business. The document should be regularly reviewed.

Structure your constitution

A typical family-business constitution might include the following sections:

• business goals, vision and values
• leadership
• management structure
• entry principles for family members
• succession and exit policies
• rights, responsibilities and obligations of family appointments
• rights, responsibilities and obligations of family members not working in the business
• appointment and rights of non-family board members, management and employees
• training, remuneration and appraisal of employees — both family and non-family
• developing the next generation
• involvement of non-executive directors and other outsiders
• communication channels
• dispute-resolution procedures

Succession planning in family businesses

How best to pass on your business to the next generation will be one of the biggest challenges you face. You need to make the right decisions for you, your family and your business — balancing the needs of all three.

It can be made easier if you plan the succession process early — ideally when you set up the business.

Your succession plan should include:

• your key goals for the succession process
• a timetable of the transition stages, from identifying a successor to the staged and then a full transfer of responsibilities
• contingency plans in case the unforeseen happens, such as your intended successor declining the role

Questions you should ask yourself include the following:

• Does my intended successor have the right skills and abilities?
• Does my intended successor actually want to take over?
• Is my plan fair to all family members?
• Does it minimise the potential for conflict?
• Will family succession be tax-efficient?
• Is family succession the best option or would an alternative exit strategy — such as a trade sale or management buy-out — be a better option?

For further information, see our guides on selling or passing a business to a family member and how to consider your exit strategy when starting up.

You can also find out more about passing family businesses from one generation to the next.

Here’s how having a family member in the business made a difference

Peter Henman was 15 when he joined his brother as the fourth generation in his family’s Bedfordshire-based construction and funeral businesses. He worked his way up from tea boy to chairman and now both he and the businesses are reaping the benefits of the fifth generation to join the companies. His daughter Vicky Trumper is a director and company secretary of both Neville Construction Group and Neville Funeral Service.

What we did

Brought in a new era of confidence and long-term planning

“Vicky has brought in a new period of confidence for the future. In most companies, you can do three- or five-year plans but when I came into the business we talked about ten or even 15 years ahead. Now we can go back to doing that.

“For example, on the funeral side of the business, we’ve invested further and advanced it greatly since Vicky came in. With Vicky’s arrival, shareholders could see we had the ability to make longer-term investment plans that she would bring to fruition and were happy the investment was made. Without the confidence in the future that Vicky provides, the decisions may not have been so easy to make.”

Brought in experience from outside the business

“Vicky’s entrance into the business has brought a lot of people-focused skills she gained from her previous positions in the National Health Service. The health service is a people business like the construction and funeral businesses and her skills gained in another environment have helped us in sharpening our people policies.

“Now the ownership and leadership of the company are spread between the older and experienced family members and the enthusiastic younger generation, giving balance and stability and a mixture of ideas gained from different environments. It also gives confidence to the staff for the long-term future of the business.”

Allowed me to take a sideways step

“It’s almost inconceivable that a chairman of a family firm could ever walk out and shut the door on the business completely, but personally I am in favour of moving sideways. I’ve got the confidence to do that with Vicky there.

“The first generation of our company was still signing cheques at 90, the next still coming into work when he was 80 and the third died when still working at 75. Vicky’s arrival means that I may still be able to contribute for as long as I like, but with the reassurance that the core of the business is being well run by the next generation.”

What could have happened without Vicky

Fallen behind with technological developments

“Vicky did a business administration course and she did her project work on IT related to the business. That was particularly useful because she’s from a generation at home with IT. Because of my age, we were behind with this technology before she joined but now it’s spread throughout the business. She’ll perhaps bring the business closer to the world of the paperless office and instant communication than I ever could have.”

Thank you for reading.

This was originally posted at Family-run businesses | Venture Labs, however, our website is very much in alpha! We look forward to creating new content very shortly 😊