Relatively sensible: planning’s crucial role in the fate of family businesses

Think of “family business” and what comes to mind? Father and son builders working up a sweat, or huge corporate power being passed from generation to generation?

Whatever the shape and size, the importance of family businesses to the economy cannot be overstated. A report by the Institute for Family Business found 31 per cent of the UK’s GDP is produced by family enterprises; more than 40 per cent of the private sector workforce in the UK is employed by such firms. The report estimates they account for 65 per cent, or three million of the total 4.6 million, private sector enterprises in the UK economy. A study by the Austrian Institute for SME Research said 70-80 per cent of European businesses are family firms.

It has been estimated 73 per cent of such businesses want to keep the company in family hands from one generation to another. Yet only 33 per cent do so – possibly due to the complex issues involved, when expertise in family business law is often needed to untangle the web when blood and business mix.

Add to a family firm the complexity of a long list of shareholders and there’s a potential minefield around corporate succession planning, an issue central to a company’s future. Shareholder agreements, reorganisations and recruitment – and that unpopular chestnut: might a non-family executive team run the business better than the current or next generation of family members? – all come to the fore. Yet 53 per cent of family firms have no defined plan for succession.

Even ignoring the law on discrimination, and simply asking what is best for the business, staffing issues can be delicate. Should family and non-family staff be treated the same? Should relatives be guaranteed a job in the business even if they do not merit it? Hard decisions need to be made, and will often lead the business into costly legal disputes. Legal wrangles in family businesses are among the most fiercely contested, such as that which divided the family behind the multimillion-pound Patak’s Indian food empire. The dispute centred on claims from two of the daughters that they had been cheated out of their shares on the death of their father, who had founded the company. The daughters took their mother and brother to court, and ultimately received multimillion-pound settlements.

The complexity of these issues and human nature can result in them not being dealt with at all, until it’s too late. Family businesses are often run on more informal lines which may be fine until death, divorce or recession.

Getting governance right is important as, in such cases, it will, for example, be vital that what may be termed the corporate and the personal wills are aligned by way of sensible shareholder agreements and up-to-date wills. Moreover, it usually helps if the outgoing holder of the reins makes his or her wishes clear in family meetings.

One strand of current thinking is the family charter. Ignore the semantics: it is a statement of agreed values, policies, aims and relationships regarding a business. It can be especially useful if there are more than two family members who see themselves as heirs apparent, or if any non-family members are involved at a senior level in the business. It may sound trite and a bit PC but, once the agreed ethos is written down, other planning measures which use that ethos as a base can flow more easily.