The strength of personal relationships is perhaps the biggest advantage of family businesses. However, while family members tend to share similar objectives, the informal nature of the relationships within the business can cause problems.
Strong corporate governance is the foundation of any good business, but can be undermined by family members, who place less value on strict reporting structures than non-family organisations. In particular, family businesses can benefit from a more structured approach to meetings and reporting. External advisers can help bring objectivity to the meetings and address issues affecting performance, whilst avoiding family issues.
Striking the balance
The key to successful relationships within family businesses, is striking the right balance between maintaining enough control and allowing the freedom for each individual to create a role for themselves.
The new generation perhaps better understands the latest technology and its appeal to younger consumers, but the older generation still know the value of old-fashioned customer service and its role in turning browsers into buyers. Similarly, family members can underestimate the contribution of the new generation, that bring a fresh approach and new skills. Again external advisors can help map out roles and responsibilities for every member of staff, family or otherwise.
Timing is everything
When it comes to passing a business to the next generation, it’s important to plan early. But that’s where the problem usually lies. The owner has worked hard to build the business and can be reluctant to pass responsibility to another individual, even if related by marriage or blood.
The simplest step is to ensure that wills are made and re-visited every three to five years to take account of changes in both the business and family circumstances.
It is understandable for shares within a business to be passed to the next generation long before the owner expects to retire, but this desire to spread ownership and responsibility can pose a serious threat to any family business, when divorce leaves share capital beyond the control of the family.
The decision to gift shares to spouses is not one to be taken lightly and business owners should seek advice. External advisers can help deflect any criticism from family members for the decisions taken, lessening the risk of a fallout.
Business property relief (BPR) is a crucial tax relief when considering succession, reducing the value of business assets for the purposes of inheritance tax (IHT), with a reduction of 100% for most sole trader or partnership businesses.
A world of opportunities
Pressure on the young to join the family business can be a blessing or a problem. For many smaller businesses there is a temptation to combine childcare with work, exposing children to the working environment at an early age, even if it’s just sitting behind the counter.
This can inspire the next generation or put them off completely. It is something family business owners must consider carefully. A well-motivated individual, focused on joining the family business can make educational choices that bring new skills that will ultimately benefit the business.
But a world of opportunities exists beyond the family business and it is essential that no pressure, however inadvertent, is applied to children to make life choices that benefit the business, but do not suit the individual. Joining the business must be their choice.
No silver spoon
Family joining the business should earn their way, even if that’s driving the delivery van. If a junior family member is to earn the respect of colleagues, they must bring skills, enthusiasm and a can-do approach to their new career. A silver spoon is only good for stirring.
Small business owners can transfer ownership, via shares, slowly over time, using a plan that sets out agreed trigger points for staged transfer. It can be very tax efficient, with hold-over relief helping to limit any Capital Gains Tax liability.
Any decision to transfer shares or responsibility to family should be based on the performance of the business. This ensures those employees not able to own shares will still enjoy the benefits of a successful business, possibly through better remuneration packages.
Baldwins Accountants is a leading advisor to family businesses and a winner in the 2011 Family Business Awards. David Baldwin is a partner in the firm and the member of the third generation involved in the company. He has first-hand experience and in-depth understanding of the unique pressures that effect family businesses.