How to address the issues that arise from running a family business

It's often been said that family business underpins the UK economy. From small enterprises to large behemoths, more than 30,000 family owned businesses operate in the UK, generating £1.3tn in turnover, more than one quarter of the national GDP and employing over 12m people.

The average UK family business however faces unique performance and governance challenges, and less than 30 per cent survive into the third generation of family ownership. So for a family business to grow it must achieve both strong business performance and ensure that latter generations have the willingness, ability and capacity to continue and develop the business.

Invest in family relations

A family business is often founded by an individual with a great idea and considerable entrepreneurial talent. This is not necessarily a given for subsequent generations, so it is important to manage expectations of how they may contribute to the business as family conflicts over finances and disputes over policies can damage the success of a business.

Introducing policies that address sensitive issues such as a family member’s managerial remit, succession policies, and the composition of the company’s board will help minimise common disputes. Adopting a meritocratic approach to management, perhaps by establishing policies which require family members to accrue work experience outside the business before seeking senior management roles, will help to prepare the individual for a position and even inject some fresh perspectives from outside into the company.

Alternatively companies can establish procedures whereby any appointment has to be approved by the owners’ board and a group of independent business advisers.

Establish a strong ownership structure

Businesses need to establish a strong ownership structure which maintains family control while enabling business growth. Financial policies which aim to keep the family in control of the business, such as regulating how shares can and cannot be traded inside and outside the family, will ensure that the business does not stray too far from the ethos of the family. These policies also allow the company to build a growth strategy on the basis of reinvested profits without diluting ownership by issuing new stocks.

By combining an ethos of ownership with a strong sense of purpose, businesses can ensure that the composition and election of the company’s board is underpinned by the family’s values.

Prioritise governance and develop a dynamic business portfolio

Complementing the family’s knowledge of the industry with fresh perspectives can energise a family owned business, and so it is important that family members invested in the company participate actively in the work of company boards. Placing a family representative on the board will ensure that the business retains the core values which define the company whilst offering a fresh perspective.

Family companies should seek long term growth and performance strategies to avoid risking the family’s wealth and control of the business. Diversifying risk and sources of income will strengthen this resilience, and companies can look to move into other areas, where their business expertise is relevant, such as considering a financial or venture arm focused on SMEs, to capitalise on their own knowledge of the growth company arena from their experiences running an expanding family business.

As with families, no two family businesses are the same, and each will have their own unique idiosyncrasies. Nonetheless, by focusing on addressing the above areas, business leaders can maximise their potential for success and longevity.

Joe Stelzer is managing partner at Cavendish Corporate Finance

Image: Shutterstock

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