How to protect your family business

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We can all think of long-established, local and national businesses that operate extremely well. But there are many issues that can threaten the survival of the business through generations. When family members fall out or lose interest, things can go badly awry, destroying both business and family relations. So how can you pre-empt these issues if they arise, and manage them effectively to avoid nuclear fallout?

Forward planning is crucial, so consideration should be given to the following:

1. Employment contracts and workplace policies. Make clear each family member’s role in, and entitlements, from the business.

2. Competition and confidentiality restrictions. If a family member leaves the business, are they to be free to immediately compete with the business and make use of its commercially sensitive information?

3. Shareholder agreements that deal with the usual commercial shareholder, valuation and transfer of shares and succession issues, but also incorporate provisions relating to the family’s vision and values for the business, and how family members should treat each other.

4. Formal corporate governance with regular communication and board meetings, reducing scope for misunderstandings and facilitating commercial decision making. A non executive director could “mediate” should family tensions and differences arise.

5. Employee motivation and career progression by merit. A common complaint levelled at family businesses is that nepotism rules and merit counts for little. Firstly, employment law does not recognise family favouritism so treating a family member more favourably without justification could give rise to costly unfair treatment claims. Secondly, such family preference demotivates important non-family employees, who are liable to leave or be poached, causing harm to the business and benefit to competitors.

6. Family governance bodies to allow a forum for family discussion helping develop a co-ordinated family approach and avoid disagreement. Such bodies can also act as an important interface between family and board to reduce the risk of misalignment of respective objectives.

7. Dispute resolution mechanisms for when disagreements arise, as they inevitably will, such as confidential arbitration (independent determination of the issues) or mediation (facilitated negotiation / agreement). There should be an agreed procedure to tackle issues; the decision maker should be detached from the business and the family so that there will be a perception of fair play.

8. Succession planning. All too often, it is assumed that a business will pass to the next generation seamlessly and remain in the family forever; no proper and timely thought is given to the succession process, and no “Plan B” is devised for non family succession. Less than a third of family businesses survive into a second generation and a much smaller fraction survive into generations beyond.

Family businesses are so important to commerce but without sensible protective steps they can easily implode and in the process destroy the family relationships on which they were founded.

For advice on any of these issues, please contact Richard Gvero, head of our Employment team.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.