Having the foresight to seek expert advice has ensured the success of many family businesses, as well as avoiding a lot of emotional strain.
Family businesses face many of the same issues and concerns that other businesses do, but face additional potential pitfalls in trying to balance business relationships with family relationships, says Conor Lupton, partner with law firm O’Flynn Exhams (OFX).
“From our experience, with some planning and putting certain procedures and documents in place can help to avoid some of the most common problems,” he says. “Assuming that the business is carried on through a company or group of companies, the most important measure to put in place is a well drafted and tailored shareholders agreement which could deal with some of the main issues which would arise in relation to shareholders e.g., conflict, death, exit mechanisms and corporate governance.
“While it may not be possible to deal with every possible eventuality, certainly the most common ones can be dealt with and there are a number of potential solutions for each issue. There is no doubt that having the ground rules already set down can help to avoid conflict arising. In particular, having a very clearly set out exit mechanism for each Shareholder definitely serves to reduce the chance of conflict.”
OFX also advises its clients that is critical to prepare for the medium and long term inevitable consequences. If shares in a family company or assets are not transferred to the next generation in a timely and tax efficient way then succession planning should be carried out and implemented into a Shareholders Agreement.
“The provisions in the shareholders agreement should be consistent with what is contained in the wills,” says Lupton. “In addition, an Enduring Power of Attorney should be created to make provision for the mental incapacity of key decision makers in the business.”
Next generation
It is also essential for family business owners to plan transfers to the next generation can be done in an extremely tax efficient manner but only if this is done within the correct time scales. In addition to proper legal advice being taken covering the transfer of assets to the next generation, taxation advice should also be taken at an early stage to plan this important event in a tax efficient and compliant manner.
Lupton also advises businesses to write up a shareholder’s agreement to set out clear parameters to deal with conflict. For example, mechanisms referring conflict to mediation or expert determination can be put in place.
In addition, having clear and unambiguous exit mechanisms for Shareholders can be an extremely useful and important way to resolve conflict.
Family members who are owner-managers need to pause, listen to those not directly running day-to-day operations, and reflect
On the same topic, Carol Ann Casey, managing director of CA Compliance as well as the Small Firms Association’s expert on Mediation and Conflict resolution, says: “Conflict is a fact of life and, when used constructively, forces us to challenge our assumptions and automatic behaviours. Family members who are owner-managers need to pause, listen to those not directly running day-to-day operations, and reflect.
Good family leaders listen more, encourage opinions, cooperate and collaborate, which is much more likely to lead to an agreed position, even if it is a compromise.
“And, family owners and leaders are never too important to be nice to people, including their family directors and shareholders. By respecting, trusting and collaborating, plus espousing shared values, the possibility of conflict can usually be mitigated.”
Lupton advises that proper corporate governance structures be put in place to make it clear what decisions can be made at whatever level of approval within the family business.
Some family businesses have implemented Family Charters/Family Constitutions in recent years but these documents are usually non-binding and in the event of conflict arising may not be of great assistance.
“In fact, situations can develop where putting in place of these documents can cause additional difficulties,” he says. “Whatever about the merits of putting in place those documents, the importance of putting in place a well drafted shareholders agreement dealing with conflict/deadlock cannot be underestimated.”