Family-run businesses represent a unique blend of personal relationships and professional endeavours. While these ventures offer numerous advantages, they also face distinctive challenges that require careful consideration and strategic planning. Ryan Fitzpatrick, corporate partner at Shakespeare Martineau in Sheffield, delves into five common issues encountered by family-run businesses.
Securing the foundation: Legal structure and governance
Family businesses must have a suitable and robust legal structure and governance to thrive. Bespoke shareholder agreements and articles of association act as cornerstones – without them, shares are freely transferable under the Companies Act 2006. Provisions such as pre-emption rights (the right of first refusal) and compulsory transfer clauses (deemed transfer of shares in certain situations such as death, incapacity or bankruptcy) safeguard against undesired share transfers to unknown third parties, ensuring continuity and protecting the business from external influences.
“By proactively dealing with these issues with the guidance of experienced legal professionals, family businesses can continue to expand and prosper, ensuring a legacy of success for generations to come.”
Recently, one of our clients assumed he would inherit his brother’s shares upon his death. However, without the relevant corporate legal documentation in place, his brother’s shares in the company could have transferred to his partner who had no prior involvement or understanding of the family business – potentially jeopardising its future prospects and management. By implementing a shareholders’ agreement and preparing bespoke articles, we gave our client peace of mind in respect of the transfer of shares and the running of the business going forward.
Guiding principles: Family business agreements
Establishing a family business agreement provides our clients with a roadmap for governance and directions on family wealth. While not legally binding, this document outlines business goals, roles, policies and protocols – promoting transparency and cohesion within the family enterprise. By creating a clear framework for operation, family business agreements minimise conflicts and enhance operational efficiency.
Balancing act: Employment practices
Balancing the employment of family members and non-family members requires clear policies and procedures. Our employment law and HR specialists can help formalise employment contracts – eliminating accusations of nepotism and ensuring fairness in hiring practices.
“Planning for the future is vital to ensure the seamless transfer of leadership within family businesses.”
Smooth transitions: Buying and selling with sensitivity
Transactions involving family-run businesses demand a nuanced approach. Experienced corporate solicitors adept at navigating familial dynamics are indispensable for smooth acquisitions or sales. Sensitivity to interpersonal relationships is crucial in mitigating tensions that may arise during such transitions and can help completion to be achieved without delay.
Passing the torch: Family succession planning
Planning for the future is vital to ensure the seamless transfer of leadership within family businesses. Succession plans facilitate efficient transitions whilst preserving family legacies. Recently, we successfully advised a local family-run manufacturing business on setting up an employee ownership trust, which offers tax advantages and promotes employee engagement. This enabled the business owners to sell their shares to the trust company – securing the long-term future of the business while benefiting all employees.
Addressing the multifaceted challenges of family-run businesses necessitates a comprehensive approach encompassing legal, financial and interpersonal aspects. By proactively dealing with these issues with the guidance of experienced legal professionals, family businesses can continue to expand and prosper, ensuring a legacy of success for generations to come.