Forward planning is key for family businesses
Francis Clark partner Paul Giessler looks at the planning pitfalls that can trip up some family businesses, urging such firms to consider succession at an early point to avoid running into problems ahead of a retirement.
At last week's Conservative Party Conference, the Prime Minister made it clear that there is no alternative to austerity. The message was that Britain is a nation on the rise but to fulfil its aspirations we are going to have to bite the bullet and work harder than ever.
He particularly emphasises pushing exports, encouraging start-ups, rewarding risk-takers and eliminating "suffocating bureaucracy". All good stuff, but, as is often the case at party conference time, rhetoric elbows substance to one side.
So, in these challenging times, let us look at what really are the challenges for owner- managed businesses and what they can do for themselves to trade smarter.
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Don't forget that when we say owner-managed business, nine times out of ten that means a family business and there are some important facts to remember about them.
A total of 75% of businesses with up to 250 employees in the UK are family businesses and 50% of the UK employed workforce work within family businesses. These businesses really are the heartbeat of the economy and need some special attention when the going gets tough.
We often hear it said that family businesses, which particularly characterise the Westcountry economy, ride difficult times better than collectively-owned enterprises and many corporates. The underlying reasons for this trend are commitment to enterprises built over time by individuals, strong balance sheets and experienced management – a recipe for resilience.
This is supported by family businesses tending to be conservative and retaining profits over time leading to a stronger balance sheet and reserves to draw on when times are hard. Those family businesses that have passed down a generation have a depth of experience, and someone who has "seen it all before".
On the other hand, it is a worry that only around 30% of family businesses survive a second generation and of those, 50% don't make it to a third as other challenges tempt children away from home including alternative post-university careers.
The key for the development of a successful family business is to not let anything happen by accident – have a plan, get the right people around you and choose the right business structure.
Succession plans and strategic plans need to be started before they are needed. By the time you need them, it's too late to start. Set expectations and manage them. Get it down on paper and review your business journey on a regular basis.
You can't pick your relatives but you can find the right people for succession and make sure they have all the training they need – and that goes for family members.
The right business structure is important for operational reasons but even more so for succession. Sole trades or partnerships tend to be "all or nothing" and do not have the flexibility that separate share ownership and management that a limited company structure allows, especially when it comes to handing the business over and devising alternative exits.
Limited company structures allow older partner/directors to more easily let go while allowing the next generation to be introduced gradually with a stepped share transfer.
Family businesses can also benefit hugely from the services of a non-executive director. Bought in experience is not clouded by family emotion and has no interest in share value. It may make the founding father grumble, but the fact is that Smith Ltd doesn't have to have a managing director called Smith!