Transitioning to a family business – key considerations
Once your business is established and whether you are already family members working together or a founder wishing to involve other family members, it may be time to formalise and adjust business arrangements. As a business develops and grows, then so do the founder(s) and their family. You may not be retiring or transitioning to the next generation yet, but we recommend establishing sound governance early, while the business is still relatively young and the family group relatively small. This can help avoid and manage conflicts and issues in future.
How to get started – mapping and protecting relationships
Professional relationships are key to the success of any business, but this analysis becomes more complex when looking at families in business. The key starting point is to map what relationships already exist and their natures – who are the main stakeholders of the business? This may depend on the form the business takes already – is it a partnership or corporate for example? Who performs the key roles and where are the assets required for the business held? In the case of a company, who are the businesses suppliers, customers, employees, shareholders and directors – and which of these positions are held by family members? Do any family members hold key assets used by the business such as IP or property? This analysis can highlight any potential conflicts of interest which may need to be managed or addressed early. It can also help the business assess if the business is benefitting from sufficient diversity of skills to tackle current and future challenges or whether external input is needed. It is common at this stage for a business or the family to seek additional external advice or appoint one or more non-executive directors.
A family mission and corporate purpose
Many family businesses have a well-defined corporate purpose (a statement of the value brought by the business to society) accompanied by a set of core behavioural values. Having a sound and 'lived' statement of purpose and core values can give the competitive edge by attracting and engendering loyalty in customers, financiers, and employees. In family backed businesses, a family will often also take time to coalesce around a defined set of family values or mission statements to underpin their behaviours and objectives (and those of the business). Important considerations include how far the wider family backs the business and its purpose and the family's attitude to sustainability, as well as their guiding principles for dealing with each other.
Setting appropriate family and business governance structures
The next step is to outline how family decisions and (separately) business decisions will be taken and what controls the family will have in relation to the business. Sound communication channels should be established between the two. The choice of family governance processes will depend on the size of the business, the number of family members, and the degree of involvement of family members in the business. Larger families often have a family constitution or charter setting out family's values/mission statement; role of any family institutions; the relationship with the governing body of the business (e.g. it's board of directors) and policies regarding important family issues in relation to the business. These may include employment policies with respect to family members, restrictions on transfers of shares, and a succession policy with respect to the CEO. Family 'institutions' may comprise a family assembly meeting only once or twice annually, whilst a 'council' may be formed of those family members who take decisions of behalf of the family in relation to the business and be tasked with ensuring sound communication with the assembly.
On the business side, it is also important to establish a sound constitution and strong governance disciplines. Corporate documentation should ensure ownership rights are protected and that appropriate board structures are established. There may be benefits to having non-family members on the board in executive or non-executive positions to bring in additional skills and contacts. Often, of course, at an early stage of transition, a founder or key founding members may still be in control. In that case, establishing a robust scheme of delegation of decisions – indicating the threshold for decision making below which founder consent is not required, can be helpful to ensure smooth running of the day-to-day business. Early thought should also be given to transition and what could happen in the event of illness or a founder(s) passing away and what should happen at retirement age.
When it comes to family members working in the business, clear and transparent employment and remuneration policies should ensure there is alignment between family and non-family employees – it must be clear that merit and professionalism count.
Documenting the arrangements
We would recommend recording these points in the governing documents of the family business. It may be your best opportunity to address them now, while the business vision and intentions are clearest. The key documents - if your business is run as a company - will be the shareholders' agreement, the articles of association and employment/service agreements. As noted above, a family charter/constitution can be a useful addition for the family business. Whilst generally not legally binding, the charter provides a clear statement of intentions providing an ideal place to enshrine items that are difficult to otherwise construe as legal obligations. If your business is run as a partnership, then now may be the time to incorporate it. We have helped clients incorporate businesses that were previously run as general partnerships, to benefit from the protection of limited liability, an easily transferable share structure and customisable share rights. As well as considering the particular entity type, it may also be appropriate to consider moving elements of the existing business outside of the main corporate structure, perhaps because one family member is ideally suited to running a particular part of the existing business but would not suit the wider operation. Alternatively, you may be wise to bring into the business key assets currently owned outside of it.
How we can help
Our Family Businesses team have extensive experience advising family businesseshave extensive experience advising family businesses at all points in their lifecycle, including through the process of transition to the next generation.
We can assist with reviewing existing governance arrangements and ensuring that that are fit for purpose, providing stewardship and governance training to existing and incoming family management, and acting on your behalf as an intermediary in the context of discussions regarding the future of your business.
We are also well experienced in advising on corporate and business restructurings, including with respect to the tax.
Contact us
We hope this article and our series of families in business articles provide you with valuable insights on how you can successfully manage your growing family business. If you have any questions or need further assistance, please contact us.