The family business sector accounts for a quarter of UK GDP. Here, Phil Mitchell gives advice on managing a business that is family-run.
More than 30,000 family-owned businesses have been set up in the UK since 2010 and the sector now provides 9.4 million jobs, according to research by Oxford Economics for the Institute for Family Business. The study, which was published in December 2014, found that number of people employed by family businesses has increased by 5.2 per cent from four years ago and accounts for 39 per cent of private sector employment.
This growth of the family business sector means that it now makes up a quarter of UK GDP, with gross value added having increased by £3 billion since 2010 to reach £360 billion.
Building a family business and passing it on to your children can be enormously rewarding. However, family businesses present particular ownership and management challenges. Planning ahead and involving family members is essential to achieve business and personal objectives, make the most of the family strengths and minimise the risk of disputes. In a family business, business disputes can quickly become personal, and personal disputes can impact the business.
For many family businesses, retaining family ownership and control is a prime objective. However, it may limit growth potential. Passing the business on to the next generation can be very challenging and disruptive. From a personal perspective, the owners will want to ensure that they are treating all their children fairly, perhaps including both the children who work in the family business and those who do not. At the same time, they need to protect their own interests, perhaps withdrawing funds from the business to finance their retirement.
Tax efficiency is usually a major concern, particularly in terms of potential inheritance tax liabilities. As with other tax matters, forward planning is essential.
Another potential problem is that family-run businesses can become inward-looking or complacent. Non-family employees may legitimately resent discrimination in favour of family members, particularly if those family members have little relevant experience. Even where the owners have identified the need to bring in new talent with fresh ideas and skills, it can be difficult to attract and retain outsiders who may be concerned at the family’s influence and believe – rightly or wrongly – that they will have limited opportunity to contribute to the future direction of the company.
While building a family business can secure the family’s financial future, it can also bring an unacceptable degree of financial risk. These risks can be particularly acute when personal financial assets are concentrated in the family-owned business or the owner has given personal guarantees for business debts.
Given these issues, we recommend considering these ten points to ensure the success of your family business:
Don’t always consider dealing with the family first to ensure business success. The top priority is to ensure that the business is functioning correctly and growing. If you don’t take care of the business, the business can’t take care of the family.
Set boundaries to limit business discussions outside working hours. Mixing business, personal and home life can lead to conflict that is detrimental to business success.
Establish weekly business meetings where personal and family matters are set aside. This helps to focus the attention on the core business objectives. A strict agenda is important in achieving productive meetings. Consideration could be given to inviting a third party, for example the company solicitor or accountant, to facilitate the meeting. If non family members present, ensure they are included and their contributions are given equal weight.
Don’t provide ‘sympathy’ jobs for family members. It is important that each member of the family adds value to the business and works at a level that is aligned with their skill base.
Define clear management reporting lines in the business and ensure that these are adhered to. I see many instances where family members feel that they can reprimand employees who do not report to them.
Clearly define each family member’s role and put this in writing, such as an employment contract. This should be dealt with like any other business relationship.
Seek to ensure that family members who are looking to join the business have suitable outside experience first. This helps them to gain valuable knowledge of how business works outside the family business environment and bring new insights and ideas when they join.
Be open-minded about seeking outside advice. Family businesses at times can be too closed and seeking outside advice can help to bring fresh ideas and facilitate creative thinking. Outside facilitators can also help to make the working relationships of family members more productive. Non-executive directors can provide a fresh view and outlook.
Treat family members fairly. Family members tend to have an affiliation and affection for the business. This means that they have an energy and enthusiasm for the success of the business that previous generations have spent years building. It is important, though, to ensure that there is no favouritism. Pay levels, progression, expectations, criticism and praise should be even-handed across family and non-family employees. Remember not to set standards higher or lower for family members than for other members of staff.
Understand the advantages of family ownership and use them as a positive in marketing. Customers are very often drawn to using family businesses because of their culture and togetherness.
Careful planning will allow you to identify and address any potential problems in advance. Options include an appropriate shareholders agreement, clauses in the company’s articles of association and the use of a family trust to hold shares. Above all, open communication can help the family resolve any issues and ensure that the family business will prosper for many generations.
Phil Mitchell is founder of Harbour Key.