MANAGING THE FAMILY BUSINESS
STEPHANIE CREASEY >
Associate SolicitorWed 18 April 2018
The running of family businesses can often be more complex than those which are not family owned. Associate Solicitor Stephanie Crease explores why this is largely because of the fundamental role played by the family, and the family dynamics that are often present.
When determining how a family business is to be run, either when setting up a new business or buying/operating an existing company as a family, it is important to remember that:
- a family business needs both family and business management;
- the management structure will be unique to each family and its business; and
- consideration needs to be given to areas of particular vulnerability and sensitivity which are often only found in family businesses.
This article looks at the key issues affecting family businesses and which are particular to the management of a family business.
A family business needs family governance
While business owners recognise that they will need some form of structure and appropriate documentation in place to set out how the business will operate on a day to day basis, and how it will be directed and controlled, for families there is often also a need to put in place measures to regulate their relationship with the board of directors and amongst themselves.
The role of the board of directors in a family business will be the same as any other business in that it will need to set out policies and long/short term plans to achieve success, put in place performance monitoring systems and communicate with the company’s shareholders.
In addition to this, a family board will also need to consider the family’s long term goals to ensure that they all work towards the same common aim, put in place boundaries to limit the possible cross over between family policies and those of the business, and will need to review and manage family involvement in the business, whether this is as employees or directors.
In this situation, some families will seek to put in place formal agreements between them – this may be in the form of a partnership agreement or, where a the business has been registered as a private limited company with shares, a shareholders agreement is often a good starting point setting out what the shareholders rights are and who will have day to day control and is a legally binding document. Some families may also choose to put in place a family charter to sit alongside their formal agreement which sets out the intentions of the family in relation to the business including how the business is to be run, their relationships in the business context and their long term goals.
A unique management structure
Each family business will adopt a different management structure depending on its own personal circumstances. Factors which can affect the structure of the business include:
- The size, complexity and geographical coverage of the business.
- The number of family generations involved.
- The total number of family members and their geographical locations.
- Whether the business has non-family managers
Where a business has been in the family for a longer period of time and has been handed down to the next generations, the structure is generally going to be more complex. At the start of a family business, there are likely to be fewer members involved and decisions may well be taken simply by the immediate family who are the shareholders around the kitchen table. As the business develops and evolves, it is likely that the family will do so too and at that stage, consideration may need to be given to whether in-laws, children and even grandchildren will be involved or have a say in the business and formal shareholder meetings will likely be required.
Care needs to be taken to ensure that, when the number of family members becomes such that it is difficult to reach agreement on family policies or which direction the business should take, the situation is properly addressed to ensure that decisions are made in the best interest of the company – perhaps with the establishment of a family council representing the wider family. Such a council may establish family policies, limiting the number of members involved to ensure that the key persons are able to make the necessary decisions or guide those with lesser involvement or understanding of the business’ operations, and communicate those decisions and policy agreements reached to the family as a whole while also being able to form a conduit for the concerns of the wider family to be raised through the representatives.
Dispute prevention and areas of vulnerability
Whilst any business can be subject to disputes between those who are running it, and between the owners themselves, it is inevitable that the risk of a conflict in a family business is considerably higher. Whilst no-one wants to think that things will go wrong, it is sensible to think about what happens if there is a dispute in the future and how it will be dealt with. This is where a shareholders agreement or family charter can be invaluable. By clearly setting out in writing at the outset what has been agreed, tensions can be diffused by having a document to refer to.
Family businesses are also more vulnerable in certain areas than a non-family run business such as:
- Management and ownership succession - will all family members be involved in the management or have a say in succession plans?
- Conflicts of interest - family members are likely to have a number of different roles e.g. as an owner, employee, director and possibly as a trustee if there are family trusts involved.
- Payment of dividends to shareholders - some shareholders may be more reliant on dividends than others and to that end, consideration needs to be given as to whether any dividend policy is fair?
- The relationship between the family and non-family managers.
- A feeling of exclusion amongst those not working in the business due to a lack of communication or information about the business
- The relationship between family and non-family employees – there is a risk that family employees may be treated more favourably than those who are not family members.
- The danger of the business operating on a closed basis without external input or suitable experience to diversify the products/services offered, to develop in a competitive market or to achieve an advantage over other businesses in the same sector.
As the business develops and families grow and change, the dynamics of the business will do so. It is therefore important to keep reviewing any family business arrangements and to ensure that those involved are all working towards a common long term objective, whilst dealing properly with the management of the business and the usual requirements imposed upon business owners to ensure continued success.
To discuss any of the issues highlighted in this article or for a more in depth discussion as to how we can help you ensure you have the right structure and documentation in place for your family business, please contact Stephanie Creasey.
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