Family-run businesses

A family-run business is usually one in which more than half the shares are controlled by members of the same family. It can also be a business that has been passed between generations.

Guide

7 min read

1. Overview

Starting, leading and working in a family business can bring valuable benefits compared with other businesses. There may be greater trust between staff and increased flexibility. With careful management communication will be improved and clashes over pay made less likely.

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.

2. Advantages of family businesses

Family businesses are likely to have a range of advantages not found 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. However 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, they may accept lower pay than they would get elsewhere to help the business in the longer term, or defer wages during a cashflow crisis. You may find you don't need employers' liability insurance if you only employ close family members.

3. Key things to consider when setting up a family business

Before you set up a family business it's important to consider how you'll deal with a number of challenges. 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

4. Communication and family businesses

Putting in place good communications channels promotes better understanding and harmony within your business.

Potential 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

You can avoid these pitfalls by creating an atmosphere where open discussion and communication is welcomed. It's important that 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 rather than 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. Another option is to establish an advisory board to give 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

5. Managing conflict in family businesses

The potential for conflict in family businesses can be greater than for other businesses. However, conflict can be seen as positive driver for change. For example, family members disagree on the strategic direction of your business but this may result in a much-needed rethinking of your business plan.

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? Does one person tend to dominate?

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

For more serious matters you may want the opportunity 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.

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 prevent conflict from happening and promote positive, harmonious communication.

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.

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.

A family-business constitution might include the following sections:

  • business goals, vision and values
  • leadership
  • management structure
  • succession and exit policies
  • rights, responsibilities and obligations of family appointments
  • rights, responsibilities and obligations of family members not working in the business
  • training, remuneration and appraisal of employees - both family and non-family
  • communication channels
  • dispute-resolution procedures

6. Pay and benefits for family members

The goal is to have a remuneration strategy which is consistent, fair and open.

Resentment and conflict tend to occur when these 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. Consider writing it down, be open about it and review it regularly. Advice from an outsider -an HR consultant, for example - can be invaluable in ensuring decisions regarding remuneration are well received.

7. 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 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? Would an alternative exit strategy - such as a trade sale or management buy-out - be a better option?

Read our guide Starting up: consider your exit strategy.

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