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Wednesday, 23 July 2014

Top tips: how to run a successful family business

Cartmell Shepherd solicitor Melissa McCormick explains the possible pitfalls and how to overcome them when running a family business.

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Family- owned businesses can have unique characteristics which contribute to their success. These types of businesses are usually owned and controlled by a board of directors made up of parents, and their (adult) children. Such boards are typically larger than similar sized businesses and with this comes a broader range of experience and a more diverse range of age, gender and business outlook.

This diversity in turn can lead to a more stable business as there is a greater wealth of business experience to be drawn upon and research has shown that family businesses are usually more invested in decisions which will benefit the business in the long term, and are more risk averse.

However, the biggest pitfall for family businesses is succession. The cliché ‘fail to prepare, prepare to fail’ most certainly applies here. Research has shown that only 13% of businesses survive beyond the third generation. Whilst the key objectives behind succession are to protect family wealth and the family business and to keep family harmony intact this requires sufficient planning and not just a plan when the times comes to move on, but a clear plan which can cope with the reality of succession much further down the line.

Most families fail to plan because they are frightened of emotions running high and family members falling out. However, forward planning can help put cards on the table from an early stage and actually prevent those nasty fallings out. If a family member knows they only have an ownership share in the business when succeeding, then they are less likely to have objections when another member is running the business day-to-day. However, if this issue is only broached when succession is imminent this is when emotions are most likely to run high and people fall out as they may have expectations above what is planned.

The two main factors in any plan for succession should be ownership and management. These are distinct and should be dealt with as such. Having a share in the business is not, and should not automatically be the same as having day-to-day control/management of the business. The most successful transitions deal with these two aspects separately. Decisions must be based on business reasons not family ones, and the most successful businesses manage the transition of change through recognising the strengths within the family and most importantly recognising the weaknesses. There is nothing wrong with outsourcing the day-to-day running of a business to outside professionals or employing people to do this work if those who are succeeding lack skills and experience to do it themselves. These are the types of decisions that will make the transition from one generation to the next a success.

With a clear, shared vision, good communication and a solid plan there is no reason why succession cannot be an opportunity to take the business from strength to strength.

For more information contact Melissa McCormick or Nick Hodgson of Cartmell Shepherd solicitors on 01228 516666 today.

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