Using the law to run your family company smoothly

Running a family businesses brings an extra layer of problems — and opportunities. See how you can use the law to reduce the risks inherent in family companies and help secure the future of your company and your family.

The key to running a family company smoothly is to communicate and agree key issues with family and other stakeholders in the business, so there are no surprises. All should be able to see and understand how the interests of the business and the family inter-relate, all should have the opportunity to have their say and feel they have been listened to, and all should understand the part they play in making the business a success.

The business environment changes rapidly, and family members' wishes, needs and circumstances can change too, so this needs to be an ongoing process.

Whatever your family business, use the judgement and experience of your professional advisers to help you.

Identify stakeholders

Identify stakeholders whose interests and views you need to take into account. These can include:

  • Family members who are employed in the business or have some other stake in it — they may own shares, or have lent money to the company.
  • Family members who are not personally involved in the company, but are concerned to protect the interests of close relatives who are, such as their spouses, children or parents.
  • Family members who are generally influential.
  • Non-family employees and shareholders, particularly those earmarked to take over when you retire.
  • Lenders.

Communicate

Make sure stakeholders understand the company's business strategy — the business it is in, the customers or clients it wants and the key factors that differentiate it from the competition — and how its strategy will enable it to achieve its sales, profit and commercial targets. Discuss the structure and decision-making processes the business needs, and 'soft' issues like the sort of people you want to work with, management style, shared values and culture — your vision of the sort of business you want it to be.

It's not for everyone but consider holding a regular family forum for family members. Discuss personal, business and family aspirations, and how they fit with your business objectives, plans and approach, at an annual family forum. If it will help, consider setting out conclusions in a family charter that family members can refer to.

Communicate with non-family employees and shareholders. Include employees who you want to succeed to the business when you retire in your discussions. Involve trusted employees in part, or ask them for a workforce perspective. Regular written updates or face-to-face meetings with key shareholders may also be valuable.

Deal with ownership and management issues

Discuss the current ownership and management structure and how you see it developing in the future. It can sometimes be beneficial to split ownership of the business into separate companies, or to set up trusts and family investment companies for commercial, tax and succession purposes.

Generally, balance your wish to retain control, and receive decent dividends, against other family members' wishes to own bigger shareholdings, with more votes and dividends. If you want to issue shares to non-family employees or seek outside investment, explain why and when. Consider and take advice on different share rights for different family members, other employees or outside investors.

Agree what will happen to their shares if a family member wants to leave the business, or dies. If a family member divorces and his or her spouse holds shares, does the family want to get them back?

Plan and agree who will take over when you retire, if you are suddenly unable to work, or if you die.

If you are aiming for family succession (or mixed family/non-family succession), plan and agree your approach with both family and other key employees. Include the possibility that family members may not be up to taking over, or may not wish to do so. Your successors may have a different management style from you, so plan for a gradual handover to reduce the shock and fallout of sudden change. A successful handover can take anything from two to 10 years.

Make it clear if you would be willing to sell the business to a third party purchaser if the right offer came along, or you plan to go public.

Take advice on the tax implications of each option for each of the parties.

Make sure your employment policies are fair

Agree on an approach to recruitment of family members, for example, that you:

  • Don't create jobs for family members that wouldn't otherwise exist.
  • Only recruit family members to jobs they are qualified to do. You might decide there should be open competition for jobs, so family members aren't appointed if they are not the best candidate.

Once recruited, make clear in your appraisal system what you will reward and promote — experience, qualifications, diligence, etc. Make it clear if, for example, a younger family member can leapfrog more senior family members, or non-family members could get larger pay rises than family members, or be promoted over their heads. Use a respected third party — perhaps an HR professional — to appraise senior management, including senior family members.

If family members aren't up to the job deal, with it fast to avoid resentment from other family members, employees and non-family shareholders. Make it clear that family members may be demoted, dismissed or made redundant, like any other employee.

When discussing salaries, keep unearned income the family member gets from dividends out of the equation — the reward for doing the job should stand alone.

If the business needs funding, don't ask family members to over-commit. Take into account that family wealth (including yours) should be spread across different investments — take sound independent financial advice — and don't all be invested in the one business. Consider security for any loans from family, so they are protected if problems arise (but beware the effect this may have on existing or prospective lenders, and be aware the security may be set aside if the company becomes insolvent and you have 'preferred' family to the detriment of other creditors).

Pensions can be a valuable and tax-efficient way of keeping family members who are also employees happy — and, in certain circumstances, assets in a pension can be made available to the business. Take professional advice on the options.

Consider a dividend policy so family and non-family shareholders know what dividend they can expect if things go well, but allow flexibility in its ultimate operation.

Provide for change management and disputes

Generally, new, younger family employees will want to change things. Agree how ideas for change will be raised, and the criteria that will be used to assess them.

Agree how disputes will be resolved. Options include mentors — trusted outsiders, such as a professional advisor who is seen as independent; independent mediators who can 'broker' agreement; or arbitrators, who you agree can impose a solution if you can't agree among yourselves.

Use your advisers

Take independent, expert, professional advice on the key issues.

For legal issues, consider:

  • a shareholders' agreement
  • amendments to your company's articles to suit your circumstances
  • non-executives on the board, for impartial advice and experience
  • business mentors
  • access to a mediator to resolve disputes
  • employment and consultancy agreements
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