Knowledge Hub | Articles

09 January 2013

Family ties that lead to business success

Family-owned businesses make up over a fifth of all UK companies, employing more than nine million people and contributing billions of pounds to the economy. High Street giants Specsavers and Timpsons are among the best-known names, while JCB and Associated British Foods figure as some of the largest.

For those organisations, it’s clear that working with your nearest and dearest has been a route to success. But is it always a good idea?

Simon Deans, partner and practice group leader in the corporate and commercial team, says that no matter how close the family ties, it’s important to have the legal paperwork in place.

The firm acts for a variety of well-known family-owned businesses in the UK and is well placed to advise on the key areas often overlooked when familiarity replaces commonsense.

“People often think that if they are going into business with a family member or close friend, they needn’t worry about the legal side in the same way they would if they were starting a new business with a less familiar acquaintance or business contact,” he said.

“Legally speaking however, family businesses or those set up with friends are no different to any other business and the basic rules still apply. The difference is that there tends to be a much greater element of trust and less formality, which can cause problems if relationships sour or expectations are not met.

“It can be very difficult to step back and say ‘what are the things that could possibly go wrong’, there is a tendency to do less advance planning and to think everything in the garden is rosy for much longer.” It can, he says, be difficult to make business decisions without being influenced by personal feelings or emotions, which is why it is important keep a ‘business head’ on at all times.

In addition, the impact of personal relationships going wrong among friends or family can have a major impact on a business, affecting not just the company itself, but also the lives of all the people that work for it.

This is why Simon says it makes sense to consider and plan ahead for a variety of scenarios; from a serious falling out between former colleagues and best friends, to separation, divorce, incapacity or even death. It’s also especially important where individuals have pledged investment or other support to help get the fledgling business off the ground.

Formalising agreements on the details of the shareholder or partnership relationship ensures that not only is each party clear about what happens if one shareholder wishes to leave and sell his or her shares; but can also consider other problems, such as if one shareholder later feels he or she is making a superior contribution which is not being recognised.

It’s also important to take stock of the wider issues involved in setting up a company; such as agreeing contracts with suppliers and other stakeholders, potential liability to third parties, leases for premises, employment contracts and national insurance payments.

“In the heady days of starting a business, it’s very easy to be so excited by the ‘big idea’ that you don’t want to think about the paperwork,” added Simon.

“All these things have a price tag attached, so are easy to put off, but the potential cost of sorting out a dispute is usually far greater. And, without the right legal and business foundations in place at the beginning, you could well be setting yourself up for expensive problems in the future.”

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