Expansion & Improvement
Family businesses are one of the most common business types, constituting around 85% of the world’s companies. These businesses enjoy unique opportunities when compared to other organisations, as well as facing unique challenges. Building a successful one requires a clear view of both, taking advantage of the opportunities available and planning for potential issues.
Gary Heywood explains how family businesses can plan for sustainable success while retaining their unique character.
Why start a family business?
Starting a business with family is often a natural choice for entrepreneurs, due to the convenience, trust and flexibility of working with family. Key advantages include:
1. Access to trusted labour
When growing a business, family can be an essential source of human capital to expand capabilities and capacity. This advantage can make a significant difference to a business’s chances of success, especially in the early stages where family members can provide labour at a rate the business can afford.
2. The engagement advantage
Working with family can also expedite the hiring and onboarding process, working with people you trust and who share a passion and drive for the company to succeed. This base level of cooperation and coordination translates to a more engaged, hard-working team that can give your business an edge.
3. Smooth succession planning
Over time, these businesses can pass naturally along familial lines, solving many of the thorny issues that comes with succession planning and passing on a company. Younger family members who have grown up alongside the company often become intimately involved at an early stage, learning about various parts of the organisation, becoming ideally placed to take on ownership.
4. Stronger customer relationships
Over time, customers build close relationships with family businesses. Keeping a business within the family can also maintain long term connections with valuable clients, as well as distinguishing the company in the market.
However, in spite of these advantages, family businesses are still businesses, and long term success requires recognising the importance of the ‘business’ aspect, while making the most of what the family offers.
How to scale a family business
While family can be a key advantage in the early stages, scaling a company requires dealing with a range of challenges. As a business grows, the skills required become increasingly specific and relevant experience is necessary to take on key roles. Likewise, informal arrangements that may have suited the business in its infancy can pose issues. Key steps to maximise long term success include:
Expanding skill sets: As your business grows, prioritise key skills and competences over family ties. This requires either long term planning and investment, for example by training or upskilling key family members with internal or external education or experience. Alternatively, businesses can bring in external talent with relevant experience in target areas.
Formalising processes: The more people are involved, the more important it is to understand who is making the decisions and how chains of management function. While early stage businesses can operate more collaboratively, a corporate structure that enables clear communication and accountability is a must-have in order to effectively scale. Likewise, issues of employment, compensation, exit plans and processes must be explicitly documented to avoid potential issues.
Clarifying ownership: While a shared sense of ownership can be a valuable motivator for team members in a family business, the actual question of who owns what can become a thorny problem if expectations are not explicitly addressed and managed.
Team members may feel entitled to a portion of the business in return for their effort and labour. Recognising this can be a chance to retain and expand key roles, for example by linking shares to achievement or training, but left unattended these feelings can create tensions.
Keeping a family business in the family
One of the key challenges when growing a family business is actually keeping it in the family. Bringing in external talent or raising external funding can dilute ownership.
In order to maintain the character and ownership of the business, owners should plan ahead to pre-empt potential problems.
On occasion, the success of a family business can be its own blocker to passing it on to the next generation – the so-called ‘third generation disadvantage’. Later generations may be less willing to follow in the footsteps of their parents if the business has enabled them to pursue different ambitions in their own professional lives. This requires advance planning from an early stage.
As well as training team members, owners need to retain them for the long term. Incentives such as bonus schemes, EMI options or growth share schemes can align key stakeholders interests with the larger business to reduce risk.
How to pass on a family business
As well as bringing advantages for customer loyalty and keeping wealth in a family, passing on a business through the use of the Family Office or Family Trust can bring tax advantages too as investments can be bought and sold tax and proceeds shared within the family, tax efficiently.
Passing on a business to family can also work similarly to a management buyout (MBO) with an added advantage of flexibility in financial arrangements. For example, most families will not have the upfront capital to buy all the necessary shares outright. While management buyouts proceed with some combination of private funding and debt finance, family succession plans can take place over a longer period of time.
This means the previous owner can take their capital payment over an extended timeframe, helping the next generation take on the business without also taking on high levels of debt.
Harness the expertise to grow your family business
Family businesses are popular for a reason, offering a range of benefits for owners, customers and communities. By combining these natural advantages with the right financial advice and support from an experienced advisor, you can build a company that will generate value for generations.
Get in touch with one of our experts in High Wycombe to get the advice and support you need to build a thriving family business that delivers long term value.