Every business needs a formal structure to deal with management and control. Managing a family business is no different; working with your family can present some unique challenges and also some great opportunities.
When you start your business, you may well have an informal management style, rather than a formal management structure. Some business strategists believe this approach can inhibit growth and profitability, almost like a glass ceiling that prevents the business from reaching its true potential.
Without proper governance structures in place a family business can be particularly vulnerable.
What should be included in the governance structure for managing a family business?
A family business structure should aim to address particular areas of sensitivity and vulnerability, such as:
- Management and ownership succession:
It is vital that the governance structure ensures prudent business management. For example, what happens as and when a family member wants to retire? How do they get their money out? Who has the skills or inclination to take over from them?
- Protecting business assets in a divorce:
Many families have to face the reality that without the appropriate structures in place, on the divorce of a son or daughter, their interest in the family business may end up in the ‘melting pot’, with the risk that the court could order business assets to be sold off or transferred to an ex daughter or son in law that has never had any involvement or interest in the business.
- Conflicts of interest:
Family members can have a number of different roles in a business: for example, owner, employee, director and trustee of a family Trust. The family must be alert to the potential for a conflict of interest. It is not uncommon for non-family employees to allege that family employees are being treated more favourably than the non-family employees. Under the Companies Act 2006 there is a specific statutory duty to avoid conflicts of interest which can be particularly relevant in family businesses.
- Compliance with the Companies Act 2006:
Directors of a family business must comply with the same statutory duties that apply to directors under the Companies Act 2006. They must also comply with the same legal duties, rights and responsibilities and can incur the same personal liabilities as partners or directors of other non-family businesses. For example, directors of a family business must always act in the best interests of the company as a whole, rather than what is in the interests of a particular family member, shareholder or a particular part of the family.
When managing a family business it is vital to make sure that you put the correct documents in place and take advice from a specialist lawyer, so that you can be confident that your business is fully protected if any problems were to arise.
For further information on managing a family business, please contact Kaye Whitby on 0844 391 5830.