Family owned businesses play a pivotal role in the UK economy, it is estimated that in excess of 75% of today’s businesses are family owned and managed.
The highs and lows of operating a family firm are well documented. On the one hand the extra sense of purpose, strength of commitment and loyalty between family members working together is often greater than that of everyday employees.
However it can also produce a potentially damaging inertia and reluctance to introduce change. Not wanting to take the difficult decisions for fear of the impact on a family member, and the tendency of ‘a job for life’ employment promise for family members, often has an adverse impact on competitiveness.
Besides having a well-articulated business strategy and plan, a winning proposition to attract customers and the right level and type of resources for success, given the characteristics of a family business there are some unique considerations when setting up a family business at the outset.
Let’s consider these under the framework of a ‘Family Business Charter’. These four headings, in our experience, are the key aspects of a family based organisation that need consideration:
• Succession & Exit Planning
The legal and operating structure issues can create confusion from day one if not addressed. These include:
• How are shareholdings allocated between family members? What is the policy on non-family shareholdings?
• What are the plans for the development and recruitment of family members joining the business in the future?
• What are the rights, responsibilities and obligations of family members not working in the business – indeed, are there any?
• What’s the process for the appointment and rights of non-family managers and board members?
• Who sets policies regarding training, remuneration and appraisal of employees – both family and non-family members?
Many misunderstandings and potential areas for conflict in family businesses arise because of the assumed and informal style of communication. The potential areas of risk include:
• Family members assume they know what other family members feel or want
• Personal ties inhibit honest and frank communication
• The head of the family may assume control of the business even if they don’t have the best business skills
• Family-member shareholders not active in the business fail to understand the objectives of those who are active, and vice versa
• Non-family board or management members feel excluded if there are business discussions closed to family members only
The biggest danger to family owned businesses is that management positions are held by family members only. There are a number of practical things to consider, for example:
• Remove personal issues from business discussions by holding all management meetings in a work rather than home environment
• Appoint a non-family, non-executive director to provide an impartial viewpoint
• Ensure business decisions are taken for business reasons, rather than personal ones
• Have equality and consistency on the performance management and reward structures for all management, family and non-family
• Think business, not family when promoting and selecting managers
Succession & Exit planning
The timing and process of handing over the leadership and ownership of the business to the next generation will be one of the biggest challenges. Thoughts to shape the thinking here include:
• What are the key goals for the succession process?
• What is the timetable of the transition stages, from identifying a successor to the staged and then full transfer of responsibilities?
• Is there a contingency plan in case the unforeseen happens?
Questions you should ask include the following:
• Does my intended successor have the right skills and abilities?
• Does the intended successor actually want to take over?
• Is the plan fair to all family members?
• Will family succession be tax-efficient?
• Is family succession the best option or would an alternative exit strategy be a better option?
Drawing up a Family Business Charter
One way to manage potential uncertainty and conflict in a family business is to have a family-business constitution set-up at the outset, and refined during the lifetime of the business.
A Family Business Charter is a statement of underlying philosophies and principles. It outlines the family’s commitment to them, and also gives guidance on ‘how we do things around here’.
Top 10 Tips:
1. Create an open culture for debate and discussion among family members to determine both the family’s and individual’s objectives.
2. Make sure the family understands the business is a commercial venture that needs to be run in a professional manner.
3. Focus on objectives rather than personalities and personal agendas.
4. Do not accept ‘it has been always been done this way since Grandad’s day’ as an excuse for not making change. When commercial reality requires change, don’t compromise.
5. Individuals’ objectives and needs within the family change over time – respect these changes and ensure they are articulated.
6. Be outward and forward looking. Consider using the services of a non-executive director (not a family member) to provide a more objective view in the planning and decision-making process.
7. Identify which issues relate to family and which to business. Create the appropriate framework to deal with these separately.
8. Succession planning needs to be started sooner rather than later. Consider all the succession options with an open mind.
9. Consider the aspirations and qualities of family members to identify whether they are potential leaders and managers and consider their training needs.
10. Do not ignore outsiders – professional management may produce higher returns for the family in the long-term than an ill-qualified family member.
Constructive and productive communication is often in short supply in family businesses, because family members tend to shy away from potentially sensitive issues that they feel might generate unpleasant conflict. But the reality is that such issues can only truly be resolved if they are recognised, acknowledged and discussed at an early stage.
Conflicts between business values and family priorities can be particularly acute and troublesome in the context of management practices. Clear and explicit criteria must be drawn up relating to personnel issues and family members, and professional management style adopted at all times.
Family businesses are complex and emotion-laden issue of succession from one generation to the next. A structured, well-planned and systematic approach to succession planning is needed in order to overcome all the psychological forces that favour doing nothing.
If you would like any further information or advice please contact Stephen Robinson on 01772 735 000 or email Stephen.Robinson@championgroup.co.uk