Top 5 tips for your family business

Family businesses make up around two thirds of all businesses in the United Kingdom and are an integral part of our economy. The Institute of Family Business statistics show that family businesses make up 40% of private sector employment and almost a quarter of total UK GDP.

Family businesses come in all shapes and sizes and are typically very resilient and survive better than non-family firms, but they do face some challenges which are more common in the family firm. For example, if any relationships within the family sour at home, this can have huge implications for the business.

At Armstrong Watson we advise many family businesses across a wide range of market sectors and would consider the following tips very useful in helping you to manage your family business:

  1. Business structure and ownership – Make sure the business is structured appropriately from a commercial, tax and family perspective. A standard partnership structure may be suitable but it’s still important to have a formal partnership agreement in place which sets out each partner’s share in profits and assets. If the business and family’s assets are better served by incorporating as a limited company, it’s important to get the share structure correct from the outset. It may be appropriate to issue some family members with shares which don’t carry voting rights so that only certain family members retain control. You may also wish to be able to declare dividends for different family members independently, and this can also be implemented with careful consideration.
  2. Business management – Quite often family run businesses forget about the importance of managing the business with the same processes and documentation as any other non-family firm would. For example, family firms will often not hold structured, regular management meetings that also include non-family managers/directors. Business decisions may just be discussed around the office over coffee. Structured, regular meetings will ensure all parties can provide their input, ideas can be shared and decisions can be documented for the benefit of all. It will also ensure that key performance indicators are considered on a regular basis with all those who need to have a grasp on them. It’s also important that family members are held accountable in the same way as everyone else for their performance and actions.
  3. Strategy and business plan – Do you and the family know what your business strategy is and do you have a business plan to help you achieve your objectives? Even if you don’t have it in writing, you probably have the ingredients of a good business plan in your head which would benefit from just being put down in writing. This will provide you and the rest of the management team with a clear outline of where you are trying to take the business, what you are looking to achieve (short/medium and long-term) and allow you to monitor your progress against the plan as you go along. This should also help you work on the business rather than just in it - the rest of the workforce should have a better idea of where the business should be going (working in the business) whilst you generate more business (work on the business).
  4. Remuneration – Ideally everyone in the businesses should be remunerated according to their role, efforts and performance. Remuneration should be fair, not equal. If one family member is doing far more work than others but they are all paid the same, it will cause resentment and dispute. This may be difficult to implement in the first instance but will be extremely beneficial in the long term. How you take your remuneration is also very important. There isn’t a one size fits all tax efficient solution because family members may have different needs depending on their age, wealth, risk profile etc. It’s important to speak to your adviser about remuneration and profit extraction.
  5. Succession – having a succession plan is essential in securing the long term survival and success of your family business. The most important thing, regardless of your age, is just to get started with a plan. Involving family members in this process is the best way to begin. It might be that the next generation does not have the desire or skills to inherit the business. Even if you do decide on a family successor, you may need to formulate a plan to make sure the transfer of knowledge, skills and contacts goes as smoothly as possible. Whether you are passing on to the next generation or selling up, having a trusted business advisor will form an essential part of your plan. It will ensure you structure the succession as tax efficiently as possible, potentially saving you and the family substantial amounts of tax, particularly Inheritance and Capital taxes.

The family business that adopts a more reflective and inclusive stance on everything from strategy to succession is more likely to succeed.

Richard Askew, Corporate Director

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