Keeping family businesses professional

Published 21st Jul 2015 by bathamm
Keeping family businesses professional Keeping Family Businesses Professional According to Price Waterhouse Copper’s 2014 Family Business Survey, which analysed the responses of 2,400 family business managers in 40 countries, 32% of family firms are looking to pass on ownership, but not management, to the next generation. Only 16% of family firms have a discussed and documented succession plan in place. And 83% of family businesses have at least one procedure in place to deal with conflict. The report reckons that families are now looking at how they can professionalise the family. Jason Piper, technical manager for Tax and Business Law at the Association of Chartered Certified Accountants, notes that not every microbusiness wants to be the next Microsoft and not every family business wants to carry on for centuries. "When the time is right, a sale or winding up may be the best route for all concerned," says Jason."But working out which option is best, and how to carry it through, will take a degree of communication and coordination that may not come easily to every family." Establish a family council The dynamics of managing a family business are always going to be different to a commercial venture between strangers. This is why Jason recommends that one of the key steps is making sure that the family themselves aren’t strangers to each other’s goals and desires. “Setting up a ‘family council’ to deal with the business’s affairs, separately from the rest of family concerns, is a significant step,” he says. Communications in a family won’t necessarily be more effective than in any other commercial venture. Unfounded assumptions can abound, and non-commercial factors such as sibling rivalry or dislike of spouses can colour relationships and influence decisions, whether overtly or not. Get everyone on board Says Jason: “If it is to achieve its aims, the family council will need the buy-in of all involved, and will need to be run appropriately. It’s an investment not just in the future of the business but of the family too, and should be treated with the respect that deserves. Taking professional advice on how to structure the meetings, and engaging a professional facilitator to keep things running smoothly, will be a worthwhile, or even essential, expense.” There are a number of practical points to bear in mind adds Jason. “Meetings need to be held somewhere neutral, so that everyone feels able to contribute equally. Councils need to set up a proper agenda and timetable and stick to it. And there should be a council chair (not necessarily the head of the family or business) who runs the meetings, and has the scope to keep the discussion moving.” One further tip - to make sure that the council is a long-term success, start small and settle simple issues. That will give everyone a chance to see that the council can work, and the confidence to address bigger long-term considerations. While a family council can help with the maintenance of the business, some thought needs to be given to what happens when things turn sour. For this reason, family firms also need to have a shareholder agreement in place to regulate the relationship between the company and its shareholders and the board.  Plan ahead and keep it legal Paul Taylor, a partner at City law firm Fox Williams LLP, says agreements can be written to protect both minority shareholders and majority shareholders who play no active part in the business. Consider that a company may be launched in a blaze of optimism, but what if the bank stops lending - which of the shareholders is on standby to provide any additional funding? The family falls out - how will the deadlock be broken? One of the employee shareholders falls ill and has to leave the company. Can he retain the shares? “These questions, and many more,” says Paul, “should be posed.” He thinks that the negotiation of the shareholders' agreement provides an excellent opportunity to make sure everybody is on the same wavelength before going into business together. The biggest battleground is the whole question of an employee shareholder retaining/selling their shares when they leave the business as an employee. An equally contentious issue will be the price that the shares are sold for. According to Paul, many who are tied up in shareholder disputes see no other option but to instigate litigation. “Shareholder disputes are fertile areas for mediation. Even if the parties can’t bear to be in the same room, a mediator can come in and identify middle ground.” Many scenarios feature some form of cooperation. However, if the circumstances surrounding the exit have been particularly traumatic, often the family members will not be willing to negotiate. For the remaining shareholders, one possibility is to consider discontinuing or winding up the business; the remaining shareholders are not required to stay with the business and the leaver cannot insist they stay. Shareholder disputes are littered with legal traps for the unwary, even more so for family businesses. The shareholders should take legal and tax advice as soon as possible. If there is a potential shareholder claim being brought, the remaining shareholders should ensure that their deliberations are carefully minuted. Widget_HJ
bathamm

bathamm

Published 21st Jul 2015

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