Family firms urged to get legal advice

Blogs

It can be a source of joy, strengthen your bonds, not to mention profitable to work with your nearest and dearest. But family businesses have their own idiosyncratic complexities entrepreneurs need to be aware of. Defined as any company in which two or more family members are involved, family businesses play a major part in the UK’s economy.

“Two-thirds of UK businesses, or 4.6 million companies, are family owned. They generate more than a quarter of the UK’s gross domestic product and pay roughly £125 billion in tax: that’s 19 per cent of UK government revenues. “Family firms employ almost 11.9 million people in the UK, making up 47 per cent of private sector employment,” said Justine Osmotherley of Clarion. “As the number of family-owned businesses continues to grow, it is increasingly more important we turn our attention to the associated challenges from the outset, rather than wait for difficulties to arise.

Most problems could be avoided with proper planning.” Honest and clear communication is critical to family business success, both in terms of inter-family and employee relationships. “Successful family-owned businesses take great care to ensure they don’t create a sub-class of employees who are not family. Irrespective of the balance between family/non-family in the organisation, it is essential to avoid special favours, promotions or benefits. “It is also important not to take advantage of family members, particularly in relation to asking for excessive overtime or unpaid contributions.

It can be challenging to ensure fairness across the extended family unit, where individual circumstances can vary, so make time to negotiate overtime expectations across the business on an equitable and transparent basis.” The most important thing was to manage family expectations, particularly if some family members have a more active role in the day-to-day running of the company, she added. “There needs to be clarity as to each family member’s role, and a carefully drafted shareholders’ agreement can help achieve this. Such an agreement can also be useful to deal efficiently with any fall-outs which may arise within the business, providing a structured solution rather than the alternative of uncertainty and disarray.” Issues such as marriage and divorce can also heavily impact on family owned businesses.

“As well as the personal tensions they can cause within the business, if the legal position has not been considered, it can cause a whole host of potential problems,” said Justine. She recommended family business shareholders get pre- and/or post-nuptial agreements drawn up, to provide certainty on what will happen to their shares in the event of a divorce. “It’s about protecting the future of the business”, she said. Another point to consider is what would happen if a shareholder loses mental capacity. “It is a common misconception that capacity issues only relate to the elderly, but it is an issue that could affect any one of us at any time, so shareholders should consider having a Lasting Power of Attorney put in place to deal with their financial affairs, ” said Viv Wild, partner in the private client team.

One of the biggest challenges family businesses can face is the death of a shareholder: losing a family member is hard enough, without having the extra pressures to deal with. “There will be all kinds of questions. For example, how does a parent create equality between children who work in the business, and those who do not? “This can be dealt with effectively through proper planning by means of a shareholders’ agreement and a Will which can complement each other to cover these issues.” Couples who run businesses together face particular challenges: in addition to raising a family and navigating the changes in a relationship over time, they also have to handle the added stress of running a business.

“Business-running couples need to find their own way to remain sane and happy within a work/life relationship. Some couples take responsibility for different parts of the business so that they are not working too closely together, for example,” added Justine. Through clear communication and careful planning all the benefits of a family owned business are on offer. “Often, through a longer-term approach to growing the business on a sustainable basis, family businesses appear less vulnerable to corporate dissolutions perhaps because they embrace more responsible capitalism.

“They tend to avoid excessive debt, have lower staff turnover and take a sustainable approach to investment. In challenging economic times, family firms are often more resilient and are better placed for business recovery.”