How planning factors into a successful family business

Max Hudson and Katie Forsyth, partner and trainee solicitor at Payne Hicks Beach, lift the lid on the elements essential for a successful family business.

The Barclays Business Family Affair Report, published on 15 April 2014, has bolstered recognition of the importance of first generation family SMEs to the UK economy.

The report reveals that first generation businesses are currently contributing £180 billion to the UK economy and it is estimated that this will increase by a further £38 billion by 2018. We appear to be entering an era of the return of the entrepreneur, for the number of family businesses has risen to its highest since the onset of recession.

Their value to the UK economy is not only measured by their economic contribution but also by their substantial creation of UK employment. The question to ask now is: how can these growing businesses ensure that they do not remain ‘first generation’ businesses but manage to evolve to join ranks with the few long established family companies which have successfully managed to negotiate the generations and secure successful succession?

It is vital that those contemplating a family start-up consider from the beginning who is interested and who is not. Taking immediate steps to manage expectations is the only way that families can try to ensure that their business is the making of their family, not the catalyst that tears it apart.

One can set out the company’s mission statement in a Family Charter. This will raise a number of questions, which need to be kept under review. The questions include: who wants to be involved? Are they suitable, and what apprenticeship will they need? What happens if they do not meet the grade? Similarly, what about those who are not interested? Tax planning is essential. Details of how the company envisages that family members should be involved within the business including criteria for employment, questions of share ownership, participation and remuneration can be set out in the Charter in full.

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The Charter can also detail the company’s plan for training the next generation and formalise arrangements to ensure family members are kept regularly informed of the progress of the family business; a sense of inclusion and involvement always helps. Failing that, be sure to set out how the family plans to compensate those members who might not have wanted to be involved.

The Charter could put in to place plans for a representative of the next generation to communicate their views to the board. Growing businesses will likely never regret capitalising on the skills of the younger generation to make the most of new technologies or just training them.

If family members are kept involved during their youth there will be greater chance that they engage with the business and are united in the vision for the future. Informing the younger generation now before you hand over the reins might also deter ‘back seat driving’ from the retirement chair.

Specific aspects of ownership, including share acquisition and sale and receipt of dividends can be legally enshrined in the company’s Articles of Association and within a shareholders agreement. Legally enshrining the future of your business may seem pessimistic and over the top, but many a business has learned the hard way that success in business can tear apart the bonds of kinship.

Disputes must be envisaged from the outset for if the business is lucky to last the generations, disputes are sadly inevitable when the green-eyed monster rears its ugly head whether it is those involved who are disappointed by results, or those who have elected to remain outside who come to regret this. Do not be reluctant, where there is no likely successor, to cash in on one generation’s success. History has taught us that once the familiar and dedicated leader has stepped down, loss of confidence can creep in and blame will likely always fall on the unfortunate successor that carries the burden of the family name and the reputation of their predecessor.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.