Family businesses form a significant and vital part of our economy. In fact, research by the Institute of Family Businesses (IFB) shows that, in 2015, there were 4.7 million families in business in the UK, and the sector contributed£460 billion to the UK’s GDP in 2016-17.
Family firms experience unique issues, however, and face specific challenges that have the potential to derail plans from an early stage. So how can these be anticipated and dealt with successfully? Here are some of the dos and don’ts when setting up a family business.
Do keep communications open
It is important to operate a culture of open communication within the business so that all employees understand the working relationships and different levels of responsibility held by members of the family.
Transparency is key in this respect and helps to prevent resentment from non-family employees. If it is believed that family members have been promoted purely because of their status rather than on merit, for example, the situation will lower morale and could lead to a high turnover of staff.
Keeping employees engaged and feeling included in the growth of the business encourages loyalty, and creates a trusting and supportive working environment for all.
Do put in place formal documents and agreements
At the startup stage families tend to work well together for the good of the business, with formal agreements often being overlooked or thought unnecessary. In many ways it is even more important for family firms to formally document business issues such as leadership structure, and salary rates, given the ease with which childhood roles or divisive family dynamics can be readopted.
Formal documents and agreements provide a strong framework with which to handle disputes. They ensure fair and accurate sharing of profits and eliminate the possibility of ambiguity in certain situations.
Defining the way in which disputes will be handled is also valuable in itself. This is a sensitive area for family businesses, and it is likely that to obtain objectivity, input from an independent professional will be required in drafting the documents.
Do promote and nurture family values
The family name, in conjunction with family values, often provides a strong and unique foundation for a business, and can offer a distinct advantage over other enterprises. The family’s inherent interest in making the business a success, simply because it is a family firm, is powerful and helps to determine their long-term guiding strategies.
This common purpose also tends to display itself naturally to customers in the form of extra energy, consideration, and attention to detail afforded to them by members of the family – in the interests of ensuring customer satisfaction, but also to encourage the long-term business success.
Do consider succession planning early on
It may seem a little pre-emptive if a family business has just started, but early succession planning is crucial to ensure the business is transferred in a tax-efficient manner when the time comes.
Consideration should also be given to providing formal leadership training to those likely to take over the reins of the business, so they are fully prepared, from a purely practical standpoint, for the challenges ahead.
… And the don’ts
Don’t make it ‘us and them’
Showing favouritism to family members when they are at work will engender bitterness and dissatisfaction amongst employees who are not members of the family. This is a form of discrimination, so it is crucial to praise and criticise all employees equally when appropriate.
Allowing an ‘us and them’ culture to develop creates unrest, reduces motivation amongst non-family employees, and is likely to ultimately result in lowered productivity. Demonstrating fairness should begin at the top, and become a key feature in how the business conducts itself.
Don’t ‘create’ jobs for family members
Paying a member of the family to carry out a job that would not otherwise exist, or placing them in a role for which they are not qualified, is not an effective strategy and can compromise long-term success for family businesses.
Adopt a policy with the business in mind, rather than the employment status of individual relatives. This could include making it clear the possibility of demotion or dismissal exists for all employees if they cannot fulfil the role for which they were taken on.
Don’t let business infringe on personal life
It is easy to allow business issues to seep into personal life, but never more so when it is a family-run firm. This can be a double-edged sword, but by keeping dinner table business discussions to a minimum,it prevents the line being blurred and helps to keep business and home lives fresh.
Separating business and personal issues is a difficult mantra to follow, however – there is a fine line between quickly talking about something that happened at work, and engaging in a drawn-out analysis that should really take place in the working environment.
Don’t rely solely on family advice
Being able to rely on family in the workplace is one thing, but failing to seek independent advice at various key stages is a dangerous strategy. External advisers bring valuable objectivity and are likely to take a broader viewpoint compared with members of the family.
From accountants to legal experts, impartial professional guidance offers a family-run business a broader commercial perspective with no inherent bias or presumptions, and an opportunity to understand current trends or changes in their market.
Starting a family business can be a daunting prospect and one which requires perhaps more delicate management than a ‘standard’ business enterprise. There is much at stake, both in terms of business success and personal relationships between family members, but balancing the needs of all personnel, whether family or not, is key to running a successful family firm.
Jeff Barber is a partner at Selling My Business he specialises in business disposals and acquisitions and has over 30 years of experience.