Laying The Foundations For A Successful Family Business

The prospect of setting up a family business can be both exciting and daunting in equal measure. Whilst the promise of building a successful enterprise alongside loved ones is motivating, there is a lot to be considered at the outset, ensuring strong foundations have been laid so that the business can grow steadily and sustainably.

Like any business, there will be challenges along the way – some that are easy to navigate and others that require immediate attention in order to overcome. However, in a family business these issues are often intensified due to the mix of work and private life, with small internal conflicts sometimes boiling over into long-running family feuds.

For this reason, it is absolutely essential that a clear legal framework is put in place, outlining a formal business structure and a broad strategy that eliminates the emergence of any grey areas or uncertainty. The implementation of policies and procedures will also bring stability to your operation, ensuring everybody is pulling in the same direction and understands the processes that exist.

In this article, we will detail some of the key legal considerations for family businesses at the start of their journey, and how these various elements combine to create a blueprint that is critical to the long-term prosperity of an organisation.

Clear Ownership Structure

One of the most common points of contention within family-owned businesses is an unclear ownership structure, which can spell trouble if there are any disagreements during the decision-making process. In some cases, businesses are formed on the back of casual agreements between two or more family members, which can blur the lines when it comes to identifying the owner/owners.

As such, it is important that a formal business structure is implemented at the very outset, along with clear governance practices that are regularly updated over time. Whether it is your intention to start it as a sole proprietorship, partnership or company, it is important to first consult other family members before making a collective decision.

Ultimately, your legal rights and obligations as both an individual and business will be impacted by your choice of business structure. For example, incorporating your business as a limited company would require you to put in place certain corporate governance practices, including regular meetings with the board of directors and the filing of financial statements.

If you have gone down the company route then a Shareholders’ Agreement is required, which regulates the relations between shareholders and details how company affairs should be taken care of. Above all else, implementing a clear company structure that is backed by a legal framework offers assurances to employees and owners, mitigating the risk of any disputes occurring.

Whether or not you decide on the company route in the short term, you ought still to have in place a Family Business Agreement or Charter so that key elements of how your business is to be run can be calmly discussed and recorded before any issues arise – how you will manage the business in practice; define the various roles of individual family members both inside and outside the business; what culture you want to build; what your hopes and ambitions are for the future, and key policies on investments, asset management, resolving problems and conflicts. This will help you to understand and agree your competitive advantages, and to embed the values that are important to your family into your business.

Family Employment Policy

Although there is often a willingness between family members to roll up their sleeves and get stuck in for the greater good of the business, it is important to outline a comprehensive employment policy beforehand to ensure expectations are aligned – this is especially important if people are helping out on an informal basis.

As part of this policy, there are a few conditions that owners may feel are necessary to include. For example, the policy may state that the family member should receive a full market salary and receive the same treatment as a comparable non-family employee with regards to benefits, training and performance reviews. It is also possible to include a condition whereby a family member should report to a non-family member where possible.

Having this kind of policy in place will ensure there is no confusion or mistreatment, with all employees treated equally and fairly regardless of any familial connections that exist. In some cases, the formation of a Family Employment Committee is beneficial too, as this will take on the responsibility of reviewing personnel decisions and making impartial judgements to avoid accusations of special treatment.

At the very least, all family businesses should utilise employment contracts, offering these to all key employees including family members. These contracts are an effective way of regulating the relationship between the business and the family members within it, detailing their entitlement with regards to contracted hours, annual leave and pay.

Succession Planning

Of course, a key part of running a family a successful family business is its ability to make the transition from one generation to the next. Although it might not be on the horizon just yet, it is important that the details are carefully considered in the months and years leading up to the decision, as this will allow the process to run smoothly and without confusion or complaints.

Although the decision is yours, it is best practice to run the business with a meritocratic approach, selecting a successor based on performance and ability rather than lineage as this will help maintain healthy relationships between family and non-family members. Even if you have a candidate in mind, formalising the decision with a selection process will lend a sense of professionalism.

Once a decision has been made and someone steps into a leadership role, it is important to formalise the relationship with the correct legal documents. For example, the appointment of a director will require a Director’s Service Agreement, which details the rights and obligations they have above those of a standard employee.

Whatever the situation may be, it is always best practice to seek legal advice before entering into any such agreement. Although it might seem straightforward, the process itself can be complicated if you have not been through it before, leading to confusion or mistakes that may be costly later down the line.

Should you require assistance or support in any aspect of structural, governance or succession planning for your family business, the team at Buckles can offer impartial, experienced guidance on all aspects of ownership transferal. Contact us now to discuss the options available.