27 May, 2015
by: Cripps Pemberton Greenish

The different relationships in a family business, if not managed properly, can result in conflict and tension. That conflict and tension can, in turn, ultimately lead to serious damage, both to the family and the business.

PG Lore images 460x280px-04

So what are the areas where potential flashpoints can occur? There are many, but four of the most common are:

1 The lack of a common vision
Family members may have different answers to the question: Why are we in business together?

For example:

  • One generation may look at the business differently from the previous generation, particularly when the business moves from a dominant founder to the second generation.
  • Some family members may view themselves as stewards of the business whilst others may view the business as a method of raising capital from the sale of their shares, whether to other family members or to outsiders.
  • Those working in the business may feel that the business has reached a stage where real progress will only be made if the family seeks external management and/or external investment. To others this may be anathema.
  • There may be a view amongst some family members that it is going to be impossible to hand over to the next generation and that there is no alternative to a sale. Others may take a profoundly different view.

Many of these issues can be difficult to discuss but unless the family can debate any differences in an open and honest way and arrive at a consensus as to their vision for the business and the values which should be followed in running it, the business is very likely to suffer because the family will not be pulling together.

2 Family executives and family members working elsewhere or not working at all (“outsiders”)
Family outsiders who feel excluded – Outsiders can feel very distant from the business, even if they are owners. For some their only contact may be an invitation to an annual shareholders’ meeting (often very brief), the receipt of the annual accounts (which will often not tell them very much) and the receipt of a dividend (with little explanation as to how the amount has been calculated). Family executives need to think about how they can make outsiders feel more included. For example, more information could be provided about the accounts and any budgets or business or strategic plans. An annual family assembly can also help to bind the wider family together.

The “unfair” dividend policy – the dilemma that is often encountered here is that family executives may, because of the remuneration they receive, be less dependent on dividends than an outsider (who may have more modest remuneration from another business or be retired or a full- time parent).
Additionally there are some family executives who look on outsiders as receiving “something for nothing” when it comes to deciding on the level of a dividend. They may often be more interested in re-investing profits in the business.

A frank and open debate about what the dividend policy should be (whether in the context of agreeing a family charter or otherwise) will help. Outsiders need to understand the matters the board will consider when deciding on the level of dividend and family executives need to understand and manage the expectations of outsiders. Outsiders also need to understand that they cannot count on the same level of dividend every year.

3 Employing the family
Employing the family should in many respects be no different from employing those outside the family.

The family which fails to approach the employment of “its own” on an “arms’ length” basis could be storing up a number of problems.

Examples of flashpoints that can surface include any one or more of the following:

  • A family member is aggrieved that her child is not employed in the business whilst the children of her siblings are
  • A family member does not have the necessary experience or qualifications to hold down an executive role in the business
  • A family member is paid more generously than a non-family employee carrying out the same job
  • The job titles, job descriptions or reporting lines of two family siblings are unclear or even non-existent, resulting in (a) confusion (b) each sibling stepping on the other’s shoes and (c) a lack of clarity as to how each sibling is performing
  • Family members are not given proper feedback on how they are performing. For example, a family member assumes he is performing well when, in fact, there are serious concerns which the family are reluctant to convey to him.

4 Succession
Much is talked about the importance of succession. Why is it so important?

Succession (whether it be ownership or management succession) is at the heart of the survival of a family business and, if handled badly, it may result in:

  • an owner who has not thought through the implications (financial or otherwise) of his impending retirement
  • a retiring owner who won’t “let go” or who is seen as “interfering” after his retirement
  • a successor who quietly does not really want to be the successor
  • siblings or cousins involved in the business (or their spouses on their behalf) who are aggrieved at not having been chosen to succeed or are unclear as to what a succession plan means for their careers
  • siblings who are not involved in the business and who resent what they see as “financial unfairness” in terms of what they might expect under their parents’ will. In this context “fairness” does not always mean equality
  • key employees who become unsettled as a result of a lack of certainty over the future of the business.

There can be a lot to think about in terms of succession and leaving everything until the last moment can often plunge the family and the business into disarray
The thread that runs through many of these potential flashpoints is often a lack of communication between family members and between the family and stakeholders of the business.