Guest Blog: Common mistakes made by family businesses

Being in business with your family can be a joy and a privilege. However, simply because you are related to the people with whom you work this does not necessarily mean that it will be plain sailing.

Some of the most and common mistakes and assumptions include:

"Blood is thicker than water - we will never fall out"

This is simply not true. In fact, family fall outs, if anything, tend to be more spectacular, acrimonious and long-lasting than disagreements between arms-length business partners.

"The kids will take on the business"

Again, this is simply not always the case. While it can be with a great sense of pride and achievement to pass a business onto children, sometimes they are simply not interested or - worse - just don't have the skills needed to run the business.

"If it all goes wrong, Dad (or Mum) can lend a hand"

The flipside of the above point is very often if children do take on a business they assume that they will be able to turn to their parents for help. This is understandable, but in business, may not be tolerated by customers or suppliers - and could mask a problem that only comes to light when parents are elderly (I have had to deal with the situation where an 80-year old has had to get involved with a business that he thought he had passed on 10 years earlier).

"One more year and I'll quit"

Again, where families are involved, there is often a temptation for a parent to stay involved. This can lead to problems where - particularly if there are changes in the customer or supply chain - businesses can fall behind rivals because they are not necessarily fast enough to adopt new market practices.

"The company pays my pension" or "The company is my pension"

It is an easy assumption to make that after retirement, a company will pay a consultancy fee instead of a pension arrangement, or that company property can be rented out or sold to provide a pension pot. While this is, of course possible, the risk is that assumptions made in the past may not hold up at the time of retirement - particularly in this age of stagnant property prices.

One way to deal with these risks is to put in place a shareholder agreement.

Sometimes, the reaction to the suggestion of a shareholder agreement is shock and abhorrence, and it is seen as a cost that is simply not necessary because everyone knows what the plans are. However, if experience teaches anything it is that plans change (as one World War I General pointed out - "no plan lasts contact with the enemy" and the same is true in business - no plan survives contact with customers and suppliers).

A shareholder agreement should be seen as a safety net, preventing the business from falling off a cliff. If everyone agrees on how to deal with an issue then there is no need to refer to the agreement, but it does provide a backstop position for certain key points. Common shareholder agreement provisions include:-

  • Mechanisms dealing with the management of the company, regulating who can vote, when and who will be a director. This can avoid potential family disputes about whether or not one cousin is to be on the board over another.
  • Exit arrangements, dealing with the situation where a shareholder becomes sick, unable to work or dies. Often these can be linked to insurance (with appropriate trust and option arrangements) to provide a buy back mechanism for shares, should a shareholder leave or die.
  • Retirement arrangements.
  • A dispute resolution procedure.
  • Pension arrangements, often with company property being put into a group SIPP or SASS so that the return from the property is maximised.

A simple agreement need not be expensive, but can provide invaluable comfort and peace of mind - and help avoid problems arising when assumptions that have been made turn out to be incorrect.

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Derek Hamill


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