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Understanding how family businesses tick

Family businesses are different to other businesses.  Each family has its own dynamic, personality and values indelibly etched into the way it interacts with the business, its employees, and its community.  Family businesses can often be quirky, or conversely, be traditional, rooted in an ethos established over years, or in some cases, generations.

The dynamics of family-to-family, family-to-business come with a raft of emotions. But emotion is intrinsically linked to the family business- some help the business thrive, some simmer, some explode. Positive emotion is a great driver for family businesses, with family members having a heightened sense of responsibility, enthusiasm, loyalty and pride in the business, coupled with energy and commitment to foster the business for the good of the family. But whilst these emotions can be powerful, there will at times be emotions which have a negative impact. Typically, these emotions come about because of a family event such as death or divorce conflict with a family member, a family member new to the business or a family member who really should retire.

The family business advisor needs to understand and find fair and pragmatic solutions to the challenges which will at some point – and in every family business – affect the family and the business.  To understand what makes a family business tick, there needs to be an understanding of that positive emotion – the energy and the ethos on which the business has been built – together with the family dynamic, so that its values remain intact and harmony within the family and business can endure.

Take this example of one of my past clients; a family business with tensions affecting the business and likely to cause a breakdown, at some point, in good family relations.  The business was set up by the father. The son worked in the business, absolutely committed and driving it forward.  The daughter worked part time in the business but also had a full-on family life with very young children. My clients were a close family, with everything seeming to work well with son and daughter loyal to the business and family.

Unfortunately, the part time arrangement with the sister/daughter was not working, either for the business or for the daughter who was exhausted and overstretched, trying to juggle work and home life.  Resentment was building.
What to do?  It was decided to strip everything back to who does what, for what reward and ultimately who gets what from the business and when?  The sister/daughter worried that she would be left out in the cold if she did not ‘hang on in there’.   She needed the money and worried about what other job she could do, as working in the family business meant she couldn’t fit it in around her hectic family life (to the detriment of the business…).   The son resented the fact that her job really needed be done by someone able to fully commit to the demands of the role but felt his hands were tied out of loyalty to, and concern for, his sister.  He also worried that he was working exceptionally hard but did not feel he was properly rewarded by the business.

It was decided that the sister/daughter would stop working for at least a year and that she would be paid not to work during that period.  The position would be reviewed after a year when her children would have started school. Mum and Dad advanced the daughter a small lump sum from personal funds (to be deducted from her future inheritance) which helped alleviate some of the financial pressure on the daughter and importantly made her understand that she was as valued as her brother.

A clear formal mechanism was put in place so that the business would pass to the son and daughter equally when Dad died, but that the son would have the ability to buy his sister’s shares at full and proper market value.  The son’s commitment to the business on an everyday level was more properly rewarded with a salary and benefits that reflected his role in the business.

This solution meant the sister was helped through her present difficulties, she did not feel that at some future time she had to work for the business (for convenience or loyalty), her job was filled by someone able to properly perform the role and the son could continue his commitment to the business.  Both son and daughter felt fairly treated and the business was able to move forward.

The role of the solicitor advising family businesses is to find the right framework to enable both the family and the business to thrive, so that is continues to tick and endure these challenges.

Jane Latham, The Family Business Lawyer.  Call 01225 287516 or e mail: jane.latham@lcls.co.uk

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