Eight Key Questions For Family Businesses

Family businesses often have great strengths arising out of the family members’ commitment and long schooling in the culture and operation of the business. But the family aspect also creates specific issues in any business that will affect the business and its operations.

The involvement of, and interaction with, a family is obviously the key difference between family businesses and others. And families are complex emotional units with dynamics and relationships that involve a whole range of issues other than the business. Therefore, it is critical to recognise that this is the case in family businesses and take into account the family aspects of the decisions that need to be made and the influence this will have on decision making.

In any business, there will be at least two differing interest groups, the owners of the business and the workers in the business (and some people of course may be both owners and workers). The owners of a business may have quite different core interests (their financial return on their shares for example), from those of the workers in the business (security of employment for example). In a family business this is then overlaid with family membership so there may be family members who fall into any of the above categories, or be outside the business completely.

This leads to business owning families differing in the degree to which business decisions will be made in the family’s interest or of the business. In some cases, the business is run purely in the business’s best interests, in some cases it is run purely in the interests of the controlling family. Most family businesses operate however at a point somewhere between these two extremes, although the way in which family or business interests will be balanced in any particular decision may vary depending on the matter involved.

Specific questions family businesses need to address are:

1 – Succession – restriction of the choice of senior managers or directors in the business to only family members can be a huge restriction on the use of the potential pool of talent within the business. Equally, businesses often struggle to achieve an effective hand over to a younger generation when the older one is still within it, and businesses can remain in a state of limbo, in some cases for many years as no one is really sure who is actually in charge.

2 – External capital – there is often a reluctance to allow ‘outsiders’ to participate in the company’s equity.

3 – External skills – it can be difficult to attract high quality external management into a family business, as potential candidates will be conscious that the centre of power can lie within the family structures, with all key decisions taken around the Sunday dinner table for example, rather than formal business structures, and there may be limits to promotion where certain roles are reserved for family members.

4 – Inflexibility – some family businesses carry on with, or are reluctant to change, parts of the business on the basis of emotional attachments, such as grandfather started the business making widgets so we cannot stop now, rather than commercial logic.

5 – Fairness – if members of the family are employed in the business their treatment compared with non-family employees, for example, on timekeeping can be quite different from that of other staff, which can have a real impact on staff morale.

6 – Diversion of resources – in a family business which is regarded as ‘owned by the family’ (or an individual entrepreneur), there can be a risk that company funds are used to meet more and more personal expenditure such as telephone bills, parking tickets, subscriptions, computers for home use, box at the local football club (of course it’s used for marketing purposes) to the detriment of the business.

7 – Don’t want to be here syndrome – family members may go into the business because they are ‘expected’ to do so, rather as a result of any vocation or aptitude for it.

8 – Dilution of interest – as the firm passes down the generations, shareholding can become subdivided into smaller and smaller lots leading to potential difficulties in obtaining clear decisions about some issues. This becomes particularly accentuated when the family shareholders are divided into those involved and those not involved in the management of the business.

So, if you are running a family business, particularly in challenging times, isn’t it worth taking a moment out from thinking about the business to consider how the business and your family members’ interests actually interact and its impact on the success of the business?

Of course, the information in an article like this can never be a full statement of the legal position as the relevant laws are complex and liable to change. This article can only therefore be a general guide as to the issues involved and as these can have serious implications you should always seek appropriate professional advice on your own particular circumstances before taking any action.

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