Keeping a business in the family isn’t always harmoneous, says John Davies, head of business law at ACCA.
Family firms make up 65% of the UK’s 4.6 million small and medium-sized (SME) businesses, according to research by the Forum of Private Business.
It seems like a great idea; set up a family business and ensure that children and grandchildren have a job for life.
Yet statistics from Bournemouth University Business School show that just 30% of owner-managed enterprises survive to the second generation, while only 13% make it to the fourth generation.
Conflict inside the controlling group is high among the reasons for failure. A successful business can become a nightmare when threatened by family conflicts and the emotional baggage of its principals.
Many business people assume that communications inside a family firm are likely to be better than in most companies. Unfortunately the reverse is more often the case. Effective mechanisms for communication inside the owner-managed firm are often absent.
Even where structures for consultation appear to exist, many businesses are hierarchies or autocracies where tacit understandings ensure that concerns remain unspoken or commercial decisions are based on value judgements.
Consider the fictitious example of a small haircare business owned by one family. For years, the three directors had drawn the same salaries, despite contributing different skills and varying time commitment.
This element of the creed was not on the agenda for discussion. It became increasingly irksome to other members who were expected to accept the same principle. An agenda emerged for two members of the successor generation.
They decided to talk to family members who, they felt, were not pulling their weight. It later emerged that those same family members agreed and did not see why they should be paid as much as the next generation of directors, but by then the damage to company unity and purpose had been done.
Hidden agendas are always damaging in any enterprise but in an owner-managed one they can be especially dangerous. These can include:
- The role of family members in or out of the business
- Remuneration and equity ownership
- Exit routes and retirement
- Non-family members
- Preserving or spending wealth
- The general direction of the business – is it a family business first or a business which happens to be run by a family?
The roots of strife often lie at least as much in sibling psychology and emotional history as in real issues of strategy or management. Family relationships are fixed before business ones. The origins of any dispute may be totally irrational, nothing more than “Mum loved you more” but they are nonetheless critical to the feuding parties.
So, how can the potential for conflict best be minimised or actual conflicts resolved? Of course, the family has to want to solve key problems. One response to conflict prevention used to be simply to make the eldest sibling the boss, an approach that only works for the long term when that individual has the wisdom of Solomon.
In reality, prevention is a matter of good communications, for instance through a family forum or council, combined, perhaps, with a family constitution. This may even mean family members going on a communications course to persuade them to listen, ask for and give feedback, organise thoughts before speaking and practise both give and take.
There are at least four essential reasons for setting up a family council.
- To educate family members about their rights and responsibilities within the business.
- To clarify the borders between the business and the family and to allow all members of the family, including those at junior levels in the business or those outside it, such as spouses, to air their views. In this way, family issues can have their proper weight but no more.
- To separate business matters from other family matters: too many firms put business on the agenda when they get together for Christmas or birthdays.
- To generate a shared vision and guide and discuss its development.
If the council is to be effective, all family members must know that it is convened on neutral territory and that they are expected to speak their minds freely and honestly. The family should usually be defined in the broadest sense as those who work in or have shares in the business, as well as those who manage it.
The business’s leaders should listen to everyone and give everyone a voice. After all, even those who play no active role in the business are affected by it. It is vital that this forum should never be a place for personal attacks or the laying of blame.
To set up a successful family council, there are a few points to remember which will increase the chances of success for what will be a venture into unfamiliar territory.
- Use a professional adviser as a facilitator who can use his or her experience to see that things run smoothly
- Set up and follow a timetable for meetings
- Settle simple matters in earlier meetings. This means that family members feel comfortable about the council and believe that it is successful. Then you can proceed to more difficult issues.
- Pay attention to the quality of the meetings – make sure that the council really is a place where everyone feels at ease.
- Make sure that the council’s responsibilities are clearly allocated – there should be a council chairman, perhaps not the business’s leader.
A family constitution can provide a long term framework to build both the trust and best practices suggested at the family council. This is a written statement of values and objectives with regard to the business, containing:
- The objectives of the business
- The underpinning philosophy of a family business or a business, which happens to be a family
- Remuneration and equity ownership polices
- Policies on entering and leaving the business
- Policies on the role of non-family members
- Criteria for succession.
Many family businesses may extend the constitution to cover a range of issues affecting internal and external relationships and conduct. If successful, this process should help to give a very strong sense of direction.
Of course, the constitution may create a range of future issues and so detailed clauses on exit or entry may need to be legally enforceable. A formal disputes procedure should also be set up.
Contrary to popular mythology, family firms do not outperform non-family businesses. Family chemistry may give certain advantages; loyalty and continuity for example – but it also brings balancing disadvantages.
The Spectator magazine once described family business as “an endless soap opera of patriarchs and matriarchs, black sheep and prodigal sons, hubris and nemesis”. Don’t let your business become a soap opera!