In order to protect the continuity of a family enterprise for the benefit of future generations, there are three key areas that need to be addressed upon the business’ formation, namely family and corporate governance, ownership structuring, and succession planning.
Here, we'll explore the structural considerations and processes that all family-run businesses must adhere to promote long-term growth, security and longevity.
Governance Structures
There are important questions that must be answered at the outset of any new enterprise, such as ‘How will the business be run?’ ‘Who will be responsible for making the important decisions?’ and ‘Who within the family will have a say, and what kind of gravity will their opinion have?’ Having robust governance structures in place determines the boundaries for family member involvement and formalises the areas of responsibility.
There are two distinct areas to consider when it comes to governance – namely governance of the business, and governance within the family itself.
Family governance establishes a shared decision-making system based on a family's history, values, and purpose, drawing inspiration from corporate governance while prioritising communication over the day-to-day formalities. It enables structured discussions to take place on complex issues whilst facilitating family members' integration into the family and business network.
Regular family governance meetings promote communication, decision-making, and understanding of the family's narrative and vision, often incorporating educational aspects about unity, wealth expectations, and business involvement.
Equally, the formation of a Family Council acts as a liaison for family members outside the immediate business operation, ensuring diverse representation and involvement in the family's commercial interests.
Business governance, on the other hand, is pivotal in reducing internal conflicts, delineating authority and decision-making processes within the business. Depending on the business's size, governance may involve a board of directors overseeing direction and control, or an executive board managing day-to-day operations and strategy.
The ‘four-room’ model is recommended for clarity, dividing responsibilities among the owner’s room (board management and strategy), the boardroom (supervision and hiring), the management room (business strategy and operations), and the family room (shared goals and legacy).
This will only be effective, however, if there is a clear ownership and role structure in place which is representative of the business’ goals.
Ownership
Selecting the appropriate structure for a family business in the UK requires careful consideration of various factors including legal and tax implications, desired control levels, the extent of business involvement, and estate planning objectives.
Corporate structures, for example, can offer liability protection but require more in terms of compliance and organisational costs. However, for some family businesses, especially larger ones, the separation of management and ownership without compromising professional governance may be more beneficial.
Considering what is best for the continued growth of the business, and protecting the prospects of those invested in it, is essential in determining the most fitting business structure. There are numerous options available, but not all will suit the business’ needs.
Sole Ownership: Sole ownership is prevalent in the UK, especially among small businesses, due to its simplicity and low start-up costs. The main advantages include complete control over decision-making, ease of setup, and retaining after-tax profits. However, this business structure faces challenges such as a limited succession pool and the burden of unlimited personal liability, which may hinder funding opportunities due to perceived financial risk.
Partnerships: Starting a family business as a partnership, as defined by the Partnership Act 1980, involves individuals working together with the aim of making a profit. While establishing a partnership can occur unintentionally and without a formal agreement, it's crucial, especially in family businesses, to have clear terms outlined to avoid complications. A family business structured as a partnership typically limits ownership to actively involved family members, fostering resilience and innovation through diverse perspectives. However, this model can also introduce competitive tensions among family members vying for specific roles, underscoring the necessity for clear governance. To mitigate potential disputes and articulate the allocation of profits, losses, and decision-making processes, instituting a formal partnership agreement is