Nurturing the Family Business

In the UK, an estimated three million businesses are family-owned, representing nearly two-thirds of all private sector firms. Some of the most successful companies are family owned and run and having worked with many such businesses over the years, we have seen first hand that they face a unique set of challenges in being successful.

In this article, we'll look at the common issues and provide some tips to overcome them based upon the experiences of our clients.

The key areas our clients most often talk to us about are:

Employment

When considering a family member for employment, will this be done by assessing their capabilities, commitment and attitude or will emotional ties play a big part in the decision? And how will this impact on non-family team members if they feel that a son or daughter of the boss has been given an easy ride? It can easily dent morale and the business could be carrying staff members who may not be adding value to the organisation.

Tips for employment

  • Family members often benefit from getting work experience outside of the business so they get used to authority and can add value in the business with their experience.
  • Be fair. Don't offer a better package to a family member than to an equivalent non-family member. Keep to the same appraisal and disciplinary procedures as you would for anyone else.
  • Promote the talent. If a non-family member is right for a senior position, don't let the fear of loss of control put you off in making the right decision for the growth of the business.
  • Don't pressure family members to join the business if it's not 100% what they want.

Communication

Given the personal relationships, you might think that communication in a family business is free and open but that's not always the case. Management style needs to be considered to ensure that all employees are listened to equally, whether family or not. Encouraging two-way communication between all levels of the business is also key. Maintaining separate company and private lives is crucial, both for the discipline of the business and the sanity of the family.

Tips for communication

  • Make it clear that the business is a commercial venture that needs to be run professionally.
  • Don't ask others to relay messages for you as this can create misunderstandings.
  • Avoid finger-pointing at other family members and be constructive.
  • Try to avoid taking the discussions home.

Succession and tax planning

Transferring the business to the next generation often poses some difficult decisions at a time when the business can be at its most vulnerable. While many business owners don't have a clear idea precisely when they want to hand over the reins, failure to prepare early could not only have difficult consequences for the business but for the family too. However, when planned and managed correctly, the success of the business can be enhanced.

There is a huge range of things that will need to be considered. For example, are your family members best placed to run the business? Of your children, who will have the most control? Is it the best financial decision for the family or should you consider outside options? What are the tax planning implications?

Tips for succession planning

  • Start by considering all succession options objectively and engage your family in your intentions from the beginning.
  • Consider the skills and goals of your family members for the long-term future of the business. Are there any gaps in their experience that need filling before they take over the hot seat? Would alternative management create greater success for the business and returns for the family members still involved?
  • Don't hold a tight grip on control during the transition period. You'll need to work together with your successor on projects, with clients and other parties who are relevant to the business.
  • Finally, as one of our clients once said - go when you said you'd go!

If carefully managed , this can be an ideal oppor tunity to extract some funds from the business in a tax efficient way. A purchase by the company of its own shares from the older generation may qualif y for treatment as a capital gain that can qualify for the 10 % tax rate provided by Entrepreneurs Relief. At the same time the share buy back can also pass ownership to the next generation without tax implications for the new owners.

Aside from succession there are other areas which require tax planning. For example, the control of the business and distribution of profits can be addressed by having different levels of share holdings or shares with different rights to votes or dividends. This can help ensure that tax is minimised by using the lower rate tax bands of family members.

Inheritance tax (IHT) planning should not be ignored. An owner of a business can be wholly exempted from IHT on the business assets due to Business Property Relief, so careful consideration is needed before the older generation converts their exempted interest into taxable cash.

To find out more about how we can help you with succession planning and share structure, please contact your usual partner or Peter Minchell on 020 8652 2450.

To find out more about how we can help you with succession planning and share structure, please contact your usual partner or Peter Minchell on 020 8652 2450.

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