How family businesses can stay entrepreneurial

Every business needs to remain entrepreneurial. However, a family business faces unique challenges as growth and changing needs of the business will often come at the same time as the family grows and the involvement of family members in the business changes.

As a business evolves it may diversify into complementary lines of business or even unrelated business lines. In a family business this can occur where different parts of the family have differing visions, but there remains an overarching desire to keep the family business as one. This can lead to a successful, diversified business, but can also very quickly lead to a loss of direction and much worse. How have we dealt with this?

There are a number of options and rarely a solution that isn’t bespoke to the family business in question. However, below are some of the structures we have created.

Reward the workers

An obvious solution would be to create a remuneration policy for working owners that reflects their additional contribution to the family business. Managers within the family could receive anything from a salary, to more complicated bonus arrangements and even share options to reflect their success. The business does need to be careful however, that the remuneration and employment rights are carefully understood before being entered into as underperforming family members can be a huge drain on a family business.

De-merge

The differences in vision, in business lines or sometimes in relationships between family members can be so significant that the breakup of the business between family members is the best option. We had a business that had accumulated a significant property portfolio whilst retaining the existing trading business. The property portfolio was spun out of the business into a new structure for all the family to retain ownership of and a professional firm to manage, with the trading business being purchased by those involved in that side of the business as a “family buy out”.

Third party sale

Sometimes the best option is to sell the business. We have done this where the family has become deadlocked, where the income for the family is no longer sufficient and realising the capital value is in everyone’s interests, or simply where the family itself recognises the fact that the family hasn’t the resources or interest to keep the business going.

Share entitlements

The shares of the company could be re-designated to reflect the interests of different parts of the family in different parts of the business.

We advised a company whose shareholding was essentially in four family blocks to re-designate their shares into alphabet shares (A, B, C and D shares). The families had contributed their own assets to different parts of the business and wanted this to be reflected in the shares of the business. The re-designated shares provided for certain rights relating to those different assets and the business lines they served to require the consent of the relevant class of shares.

Outside help

Bringing in non-family members at a senior or director level can often be difficult for family members. However, many family businesses benefit from the experience or skills that lie outside the family that may take the business to the next level or free up the entrepreneurs in the business to focus on their strengths.

We have advised many clients on bringing in outside help and structuring remuneration and, at times, share option packages including growth shares (which share in the increased value of the business). Remember however, if shares are being offered that there is a mechanism to recover the shares for under-performance or dismissal.