Success and succession – shaping your family business

21 December, 2018

In this week’s edition of the trainee blog, second year trainee Tom Bushell discusses family business structures and the difficulties that can arise when members wish to retire.

 

Two thirds of businesses in the UK are family owned, including 17,000 medium and large businesses. Together, they contribute 20% of government revenue and a quarter of our GDP.

These businesses are handed down through generations, sometimes spanning decades and even centuries. Britain’s oldest, R J Balson & Sons, has witnessed 23 monarchs and 53 prime ministers in its 500 year history.

The strong bonds of the family unit can certainly lend themselves to an effective business model, yet only 10% of family run companies survive to reach the third generation.

This is not to say that the other 90% have failed – success and longevity are not always the same thing.  It all depends on what the family hopes to achieve through their business.

 

What does success look like to you?

For some, the ability to provide secure employment for family members will be a key concern, while for others it may simply be the shared enjoyment of a family passion. Success could also come about through the sale of the business, allowing the family to enjoy the fruits of its labours, or move on to other ventures.

If the founding generation does decide to step back from the business and pass control to the next, they will be faced with a question: Who will take over ownership and control?

Where there is a single successor who wishes to take on full responsibility, the process will of course be a simple one. What if, however, there are several family members who wish to be involved? And what if there are none? Can interests be shared where some family members will be more involved than others?

Here are five suggestions that a family in business may consider in order to answer these questions:

 

1     Owner/Operator

This is a clear option where there is only one person capable of inheriting the business. Here, the business is owned wholly by a single individual, who has complete control over its direction.

While this provides certainty in terms of ownership and control, it is also the most open to dispute by other family members who might also wish to be involved or feel they should share in the rewards.

 

2     Partnership

A partnership will allow the business to be owned jointly by multiple family members.

On the face of it this could be the fairest way to share ownership – each family member having an equal share. However, some might be more active in the day to day running of the business than others. These individuals might require recognition for their efforts – usually financial.

So agreeing how the proceeds of partnership will be shared, taking account of contribution, is key.

 

3     The Distributed Model

This is the traditional corporate structure, where ownership of the business takes the form of shares in the company. The model allows all family members to have an independent stake in the business as shareholders. It is not necessary for all to be involved in the day to day running of the business, and a salary system can be agreed for those that do take up this role.

It is easier using this structure for retiring family members to retain ownership of a portion of the business, which may be especially important where they require an income in retirement.

 

4     Playing to your strengths

A great option where a degree of separation is desired by the next generation, the ‘nested model’ involves splitting the business structure into separate branches with an individual family member responsible for each. This can reduce the chance of conflict and allow different family members to explore individual interests under the umbrella of the company.

While this may reduce conflicts in the daily management of the company, there could instead be disagreements surrounding the sharing of funds and profits within the business as a whole.  Users of this model will need to ensure that the extent of the autonomy between branches is clearly set out and adhered to.

 

What if there is no clear successor?

It might be that when the current owners elect to retire there is no clear successor to take control. Does this spell the end for the family business?

There are really only two options here – sell or wind up the company, or bring in someone from the outside to take over management.

The latter option could be a good strategy where there is potential for members of the next generation to become involved in the future. Perhaps right now they are too young, or engaged with other projects.

Where potential successors lack experience in running a business, appointing an ‘outsider’ could be a source of valuable guidance for the up-and-coming generation, while they learn the ropes – if they can be patient for their turn.

While it might be difficult for business owners to consider stepping down from something that has played such a significant role in their lives, clear and early succession planning will provide a stable platform for when the time does come to step aside.