Factors to consider when running a family business
A family business can be a roaring success, but it’s important that they are managed constructively to keep the business healthy. The last thing a business needs is the owners to be in disagreement over a dispute.
Determine the business form
Different types of business organisations can suit different circumstances. Consider a Partnership, LLP, or a Limited Company? Take professional advice to establish which model works best for your business.
To find out more about the different types of form, you should obtain a specialist solicitor, who can break it down for you. Depending on your industry, one business form may suit your needs better than another.
Decide on ownership
You need to document the nature of the parties ownership in a business and what proportion of the business is owned by each party and what their obligations are in respect of the business.
If one party is investing money in the business, how is this reflected? It could be dealt with by way of a director’s loan into the company with repayment terms or it may be that the person investing the money acquires a greater a stake in the business. Each individual scenario needs individual consideration.
Get any legal documents in order
It is vital that the owners of the business have appropriate contracts documenting issues such as ownership in the business and exiting the business. You must have created written agreements detailing roles in the business.
If family or friends want to invest in the business, you will definitely need an agreement that protects both of you. Consult a Solicitor before you commence the business to ensure that the correct documents are in place and are all in working order.
Having properly drafted legal documents written by lawyers avoids disputes arising later down the line.
Succession planning in a family business is not necessarily just about the legal process but there can be a number of practical issues. Over 50% of family-run businesses fail during or after passing the business down a generation. This is often due to poor planning and training.
Provisions need to be in place to control how businesses will be passed to family members in the event of both planned exists and also in unexpected circumstances, such as a death or incapacity.
Plan for issues that may occur
Make a list of ‘types of contingencies’ that may occur. What if someone has to cancel going into work last minute and stay at home with a child?
It’s important to try and cover who is going to do what in the case of emergencies or disputes. It is also important to remember that disagreements are never personal, just business. In family-owned businesses, sometimes the lines can blur.
You can try to avoid this by setting clear boundaries, rules and expectations from the get-go. It is also important to communicate clear measures of success, so everyone has clarity in their roles.
If you foresee a dispute, get outside advisors involved
Having professional legal and financial advisors who aren’t family or friends can diffuse tensions that may arise along the way. It is imperative to seek clarification on issues you are unsure of. Gaining the expertise of a legal professional will help resolve the issue with speed and skill, if you run into a problem.
Going into business with friends or family members can be a great idea but it can also cause tension or relationship issues which may not have otherwise been apparent. It is vital that you treat the relationship as a business relationship and to clearly distinguish between the business and personal relationships. This can be difficult to do, and gaining mediation from a team of legal professionals can help relieve the burden.
If you require any more information on setting up or running a family business then seek professional help and support to keep things from getting personal!
Have you any questions?
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