How to run the family firm

Running any firm has its challenges, but keeping a family company on track often requires a careful balance of business strategy and personal relationship skills. Corporate issues such as share ownership and board structure become far more complex and potentially business threatening when it is family members who disagree.

A simple solution, yet one that many firms overlook, is to draw up an agreement to head off potential shareholder problems and serves as a blueprint for the structure, management and future of the business.
Paul Johnson, a partner at Yorkshire law firm Keeble Hawson, says: 'The law confers only basic protection to a limited company or partnership, which is how the vast majority of family firms operate. What it doesn't deal with are issues such as succession planning, non-performance of family members and the transfer of shares.

'These need to be addressed, agreed and documented, so if conflicts arise there is a process in place for dealing with them.'

Without a written agreement, disputes can leave a business in deadlock.

'Take a hypothetical case of a business owned jointly by two brothers,' says Johnson. 'If one dies and his shares go to his widow, depending on what she decided to do with them, the business could be in trouble.'

A shareholder agreement would cover such an eventuality, in most cases by giving existing shareholders the first option to buy the shares.

Johnson says: 'People can be superstitious. They think that by raising these difficult issues, problems are more likely to happen. But the priority must always be to protect the business' future.'

Sisters Linnhe, Bryony and Cadi Cadlow set up their short film production studio 3 Bear Animations nine years ago near Kendal, Cumbria.

Though the three are close and rarely row, they decided it would be sensible to have a shareholder agreement.

Linnhe, 29, says: 'Though we all have long-term plans for the company, we know that if we go our separate ways, everything will be split equally.'

Assigning the key roles was just as straightforward. Linnhe, who manages the marketing and website operations, says: 'When we started out, we were all trying to do a bit of everything, which wasn't terribly productive, so we identified our individual strengths and skills and decided on our individual roles.'

Her twin sister Cadi heads the creative side, while Bryony, 25, handles finance and accounting.

Grant Gordon, director-general of the Institute for Family Business, says appointing family members to decision-making roles is an area where there can be no compromise.

He says. 'In the gene lottery there is no guarantee that a family will produce good leaders every generation, so the role of managing director or chief executive must be assigned according to skills, experience and qualifications.'

Melanie Wood, 33, and her sister Vicky Gibb, 34, along with brother Gordon Gibb, 31, had business ownership thrust on them when their father, Robert, died in a road accident 12 years ago.

He was the founder of the Pleasure Island Family Theme Park in Cleethorpes, Lincolnshire, and Flamingo Island and Zoo near Pickering, North Yorkshire.

Melanie says: 'Though we all had summer jobs working at the parks, we hadn't really planned to make a career of it. But given the situation we found ourselves in, we immediately committed to taking on the business.'

Chief executive Gordon and Vicky and Melanie, both directors, each own 30% of the shares, with the remainder held by their mother.

But there are no immediate plans to bring any other family members into the business, which employs 450 and has a turnover of £23m.

Melanie says: 'Our current board structure works very well and we don't see any reason to change that.'

However, with corporate governance a top priority for business, Grant says a key element in any well-run family business should be an independent voice at board level.

He says: 'The role of the non-executive director is to bring an unbiased view to the business decisions, with no vested interest. As the company grows, he or she can provide an increasingly valuable steering factor.'

Though the majority of family businesses remain in private ownership, a number have approached the public markets to raise capital and have been successful.

A study by Manchester Business School found that between 1999 and 2005, family-run plcs outperformed their FTSE All-Share peers by 40%.

Paul Crutchley, partner at Birmingham law firm Shakespeares, agrees that as part of the growth strategy, flotation can be a sound move for a family business.

He says: 'They have access to a larger pool of capital and there is greater scope for shareholders to sell their stakes. But it is a major step that should be taken only when the business is ready.'


The future in black and white

A family constitution or family charter outlines the company's values, purposes and principles and addresses a broad set of business issues. Less rigid than a shareholder agreement, a family charter can be revised and adapted as the business grows.


The key issues the charter should address include:

• Leadership, management and board structure.

• Share ownership, valuation and transfer, and dividend payment.

• Business strategy, objectives and values.

• Succession planning and management.

• The obligations of family members involved in the business.

• The appointment and involvement of non-executive directors.

• Dispute resolution procedures.