HR & Management

Good planning means fewer arguments: Key considerations for family businesses

6 min read

06 August 2018

The corporate and commercial team at Hillyer McKeown has found a common golden thread when it comes to family businesses: good planning means fewer arguments. Here's guidance based on frequently asked questions from clients – such as ownership and how to protect your assets.

An ownership structure matters. Different conceptions of what ownership means can be a real sore point amongst family members who may be more actively involved in the day-to-day running of the business in comparison to others.

So, having a clear understanding amongst all family members helps set expectations and establishes a clear platform on which to build the business. It will also help avoid entitlement disagreements. Revisiting ownership structures throughout the life cycle of a business will also help ensure the governance model is still fit-for-purpose.

Below are five commonly used ownership models.

1. Owner-operator: Ownership is limited to one person or a few key people. Think of a founder that then appoints a successor and so on. For this model to work, family members all need to agree on who the core members of the business are.

2. Partnership: A partnership model can work well when there is equal involvement and all partners benefit from success. Some things to consider are how other family members can enter the partnership and how decisions can be made if there is a stalemate when full consensus is needed.

3. Distributed: The active involvement of owners in the business is not a condition of ownership, rather the business is held and passed along family lines. The asset ownership and compensation benefits under this model will be key to avoiding conflict amongst those actively contributing to the success of the business versus those that have ownership status and no involvement.

4. Nested: It allows a tighter circle of family ownership over the core brand, while some control is relinquished to “outside” members who have limited decision-making abilities. The core assets are jointly owned, but the branches are run independently. This model works well where there is a difference of opinion in how assets should be shared or risks managed.

5. Public: Family owners are rarely involved in the day-to-day running of the business under this model. This may be because they are not experts in the industry. The predicament to navigate in this situation is how family members can maintain control of the direction of the business and management of assets when their active roles are limited.

Protecting your hard-earned cash

Asset protection is not common-place amongst family businesses, but it should be. Forbes reported that of 336 middle-market family businesses surveyed, only slightly more than one in five family members who are C-level executives had formal asset protection plans in place.

It was suggested those most likely to have plans in place were second-generation family members (35%) followed by first-generation survey participants (15%). Without a formalised asset protection plan in place, you could be left open and vulnerable to threats that could spell the end of the business altogether.

But what is an asset protection plan? The simple answer is a strategy that will see your business thrive. The more technical answer is that an asset protection plan involves creditor-debtor law, which overlaps with an estate planning strategy to reposition assets out of reach of creditors.

One reason for the lack of formalised protection plans is a misconception that only large businesses need to consider them, or that only substantial assets are worth the time and effort.

When we work with businesses, one of the things we do is provide a risk assessment health check – and you can bet asset protection comes up time and time again. The choice to put formalised plans in place is a personal one and the extent of work that can be done to protect family business wealth can be tailored to suit.

If this is a concern for your business, we recommended seeking tailored legal advice as no two business needs will be the same.

Keeping control of the “reigns”

Chances are you’re not going to work forever. As passionate as you are about your business, one day you are going to hand over the reins to someone else so they can continue the family legacy. That day might come sooner than you think by choice or by accident.

Before you are anywhere close to reaching “sailing off into the sunset on a yacht” status, you should consider how the business will look without you – and who the best person is to carry forward your vision.

Succession planning is among the top concerns for family business leaders who want to ensure the growth and success of the business in a way that will honour their founding values. This should be a decision based on logic, rather than emotion.

Too often we see decisions made based on family politics, but external help can be a blessing in disguise. Those taking over can feel a tremendous amount of pressing to live up to larger-than-life expectations, but a firm plan in place well before a takeover is the best course of action to allow for a smooth transition period and well-founded business confidence.

Anne Scheland is partner and head of commercial and corporate at Hillyer McKeown, members of the QualitySolicitors network.