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Family Businesses - Complex, Interesting and...a Little Dangerous

on Friday, 16 June 2017.

At one level you are very simple - you are a family, and you run a business together

And yet you are very complex. Like other complex things, it is generally harder to fix if it breaks down.

As with any business, you need to provide strategic leadership and plan succession. Like any individual, you have a personal life outside of your business, and family that you want to provide for.

Successfully addressing these two interconnected strands of life - deciding on business and personal asset distribution to the next generation that suits everybody - works best if a family can share and clearly articulate goals, objectives and (hardest of all) feelings. Poor or no family communication can be very harmful to the business, and to personal relations within the family. This is the dangerous part. The failure of families to make a success of passing businesses and wealth down the generations is personally and financially painful. Statistically it is very common.

An Example...

In this fictional case, Chris and Sarah own a successful kitchen and bathroom design and installation business in Surrey which directly employs 20 people and makes a profit of £500,000 on a turnover of £3m. They started the business 30 years ago. Their eldest daughter Lucy is 35, a qualified accountant, and has worked in the business for 10 years. She is Managing Director, but owns no shares. Middle child Edward is a school teacher in London and has no interest in being involved. Youngest son Michael has just joined the business from college, where he eventually qualified as a plumber, having had several false starts in his career.

Chris and Sarah would like to retire within three years and move to their holiday home in Pembrokeshire (worth £600,000). Their main home in Surrey is worth £1.2m. They have some pension investments worth about £250,000, not enough on their own to generate enough retirement income. Thirty years ago Chris bought a Series 1 E-Type Jaguar for £15,000 - it is now worth £200,000. Last year they helped Edward buy his first home with a loan of £200,000. Michael lives at home, loves classic cars and helps his father maintain the Jaguar. Earlier this year they received an unsolicited offer for the business of £2m, which they turned down because Lucy persuaded them the business could grow and be worth a lot more in the future.

This relatively well-heeled example shows the complex interplay between business and personal assets in a family business, and the potentially competing interests of the first and second generation. There is clearly enough wealth to create a very comfortable retirement for the founders but what about the aspirations of their children, business and personal life? Getting this wrong could be very costly for family relationships, and could damage the prospects and value of the single biggest asset - the business.

What Should You Do?

In each family situation the answer will be different. Communications may be good already but you could start by having a family meeting to discuss everyone's personal goals and objectives. If that is difficult for one or more family member, you might think about engaging a Family Business Consultant to help you facilitate a discussion to arrive at an agreement about the way forward that everyone is comfortable with. After that your lawyers, accountants and other advisers can help you work out the best way to achieve your agreed goals.

We can guide you in these discussions, working with Family Business Consultants and other advisers to help you reach the decisions that suit your family, and your Family Business. Please contact David Emanuel in our Family Business team on 020 7665 0848.

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