A family-run business is typically one in which more than half the shares are controlled by members of the same family, or one that has been passed between generations.
Starting, leading and working in a family business can bring valuable benefits compared with other businesses - from greater trust between staff to increased flexibility. However, without careful management there can also be problems - from family members lacking critical skills, poor communication to clashes over pay.
This guide sets out the advantages and disadvantages of family businesses. It also looks at some of the key things to consider when setting up a family business and managing conflict in family businesses.
Advantages and disadvantages of family businesses
If you start or join a family business, as a family member you're likely to benefit from a range of advantages which you often don't find in other enterprises. On the other hand, you may also face some difficulties that specifically relate to family businesses.
Advantages of family businesses
- Common values - you and your family are likely to share the same ethos and beliefs on how things should be done. This will give you an extra sense of purpose and pride - and a competitive edge for your business.
- Strong commitment - building a lasting family enterprise means you're more likely to put in the extra hours and effort needed to make it a success. Your family is more likely to understand that you need to take a more flexible approach to your working hours.
- Loyalty - strong personal bonds mean you and family members are likely to stick together in hard times and show the determination needed for business success.
- Stability - knowing you're building for future generations encourages the long-term thinking needed for growth and success - though it can also produce a potentially damaging inability to react to change.
- Decreased costs - family members may be more willing to make financial sacrifices for the sake of the business. For example, accepting lower pay than they would get elsewhere to help the business in the longer term, or deferring wages during a cashflow crisis. You may also find you don't need employers' liability insurance if you only employ close family members.
Disadvantages of family businesses
- Lack of skills or experience - some family businesses will appoint family members into roles that they do not have the skills or training for. This can have a negative effect on the success of the business and lead to a stressful working environment.
- Family conflict - conflict can arise in any business, but it's important to consider that disputes within a family business can become personal as the staff are working with the people closest to them. Bad feelings and resentment could destabilise the business' operations and put your family relations at risk.
- Favouritism - can you be objective when promoting staff and only promote the best person for the job whether they are a relative or not? It is important to make business decisions for business reasons, rather than personal ones. This can sometimes be difficult if family members are involved.
- Succession planning - many family business owners may find it difficult to decide who will be in charge of the business if they were to step down. The leader must determine objectively who can best take the business forward and aim to reduce the potential for future conflict - this can be a daunting decision.
For further information see employing family members.
Key things to consider when setting up a family business
Setting up a family business can be an exciting challenge. Before you go ahead it's important to consider how you'll deal with a number of issues that can arise in family-run businesses. Consider:
- how the business' shares will be allocated between family members and if there will be non-family shareholders
- how to ensure business decisions are taken for business reasons, rather than personal ones
- how the roles and responsibilities will differ between family shareholders who are active in the business, those who aren't, and outside shareholders
- how to reward family members, whether it will be different to remuneration for non-family members and what problems this could cause
- how you will cope with conflict when it arises
- how to communicate with your family when you are also their boss
- how to communicate with non-family managers to ensure they have the key operational information to perform their duties effectively
- how to avoid resentment when deciding who will succeed you
- how to ensure that the family's finances aren't entirely dependent on the business
Advice and support for family-run businesses
Advice and support organisations for starting up and running your family businesses
Getting the right support is central to making your business a success. There are a number of organisations that offer support specifically for family-run businesses.
- The Institute for Family Business is a not-for-profit membership organisation that supports and represents the UK's thriving family business sector.
- Family Business Solutions provide services that are designed to help create the structures and practices needed to achieve best practice in governance of a family enterprise, whatever its economic activity, diversity, size or complexity.
- BDO Northern Ireland focuses on advising family owned businesses and the families behind them.
- Family Business United is an online resource centre and magazine for the global family business community. Its regional focus section includes a section dedicated to Northern Ireland.
Northern Ireland business support finder
The Northern Ireland business support finder is a searchable database that can help you find publicly-funded and not-for-profit sources of business assistance you may be eligible to apply for. Support may be available in a number of forms, including financial assistance and free or subsidised advice services.
Effective communication in family businesses
Many misunderstandings and potential areas for dispute in family businesses can be avoided if you ensure good communication channels are in place.
The risks are that:
- family members assume they know what other family members feel or want
- personal ties inhibit honest opinions being expressed
- the head of the family may automatically assume control of the business even if they don't have the best business skills
- one family member ends up dominating the business
- family-member shareholders not active in the business fail to understand the objectives of those who are active, and vice versa
- personal resentments become business resentments, and vice versa
- non-family board or management members feel excluded
To avoid these pitfalls, you should foster an atmosphere in which open, honest discussion and communication is welcomed and all family members feel comfortable enough to voice any concerns they might have.
There are a number of practical things you can do. You might:
- remove personal issues from business discussions by holding all meetings in a work rather than home environment
- create mechanisms for providing constructive feedback - this can help prevent staff, particularly non-family employees, from feeling demotivated and uninvolved
- arrange occasional away days to discuss the business' strategy and direction
- appoint a non-executive director to the board, or establish an advisory board to provide an impartial viewpoint and help prevent emotions from clouding business decisions
- establish a family constitution creating policies that will guide the family's relationship with the business
Managing conflict in family businesses
The potential for conflict in family businesses can be greater than for other businesses - typically due to a clash between commercial and emotional concerns.
However, conflict can be seen as a challenge - or even as a positive driver for change. For example, a disagreement between family members on the strategic direction of your business may result in a much-needed rethinking of your business plan and a new agreed vision for the business.
Such outcomes, though, are only possible if techniques for avoiding, managing and resolving disputes have already been established.
How to avoid conflict in family businesses
Think about how people in your family business communicate with each other. Are emotional issues kept separate from business discussions? Are mechanisms in place to allow all employees - not just family members - to contribute their views? Or does one person tend to dominate?
The best way of avoiding conflict is to prevent misunderstandings from happening in the first place. Drawing up a family constitution can help you achieve this.
Plan how you'll deal with conflict and disagreements and set this out in the family business constitution, for further information see:
Holding a meeting of the business' management may be appropriate for addressing relatively minor disputes.
For more serious matters you may want to involve an independent third party - many family businesses benefit from having a non-executive director or business adviser - to act as an impartial mediator.
Mediation Northern Ireland supports parties dealing with change, contention, conflict and difference to find acceptable and non-violent agreement.
Develop a remuneration strategy for your family business
Remuneration needn't be a thorny issue for family-run businesses. It is advised to have a remuneration strategy which is consistent, fair and open.
Resentment and conflict tend to occur when these three attributes are missing - for example, if family staff members are paid more than non-family employees without good reason.
Family members who hold shares but who aren't active in the business may also question the remuneration of those who are.
Develop a remuneration strategy for your family-run business
When creating a remuneration strategy for your family business, consider the following:
- An individual's pay should be based on their value rather than their personal need. Look at what the market rate is for the job.
- Family members shouldn't be lured into the business with inflated salaries. Likewise, they shouldn't need to endure unreasonably small salaries to prove their loyalty.
- Benefits, bonuses and incentives should be based on set criteria.
- Unreasonably high salaries and phantom jobs shouldn't be used to transfer tax-deductible wealth to family members.
- Post-retirement remuneration plans should be agreed before they come into play.
- Non-family employees doing the same work as family members should receive the same remuneration.
It's important that your remuneration policy is seen to be fair and objective. Write it down, be open about it and review it regularly.
Advice from an outsider - a HR consultant, for example - can be invaluable in avoiding remuneration disputes.
Create a successful family-business constitution
One way to successfully manage conflict in a family business is to have a family-business constitution. When well drawn-up, such a document can even prevent conflict occurring in the first place.
A family-business constitution - sometimes known as a family charter - is partly a statement of general principles. It outlines your business' core values and vision, and your family's commitment to them.
Importantly, it is also a practical guide for running the business and a framework you can use to deal with family business issues that have the potential to cause disputes.
The process of drawing up a family constitution should be collaborative, involving everybody with a stake in the business. The document should be regularly reviewed.
Structure your constitution
A typical family-business constitution might include the following sections:
- business goals, vision and values
- rights and responsibilities of shareholders
- management structure
- entry principles for family members
- criteria for succession
- exit policies
- rights, responsibilities and obligations of family appointments - pay, incentives, performance management and reporting lines
- rights, responsibilities and obligations of family members not working in the business
- appointment and rights of non-family board members, management and employees
- training, remuneration and appraisal of employees - both family and non-family
- developing the next generation
- involvement of non-executive directors and other outsiders
- communication channels
- dispute-resolution procedures
Succession planning in family businesses
How best to pass on your business to the next generation will be one of the biggest challenges you face. You need to make the right decisions for you, your family and your business - balancing the needs of all three.
It can be made easier if you plan the succession process early - ideally when you set up the business.
Your succession plan should include:
- your key goals for the succession process
- a timetable of the transition stages, from identifying a successor to the staged and then full transfer of responsibilities
- contingency plans in case the unforeseen happens, such as your intended successor declining the role
Questions you should ask yourself include the following:
- Does my intended successor have the right skills and abilities?
- Does my intended successor actually want to take over?
- Is my plan fair to all family members?
- Does it minimise the potential for conflict?
- Will family succession be tax-efficient?
- Is family succession the best option or would an alternative exit strategy - such as a trade sale or management buy-out - be a better option?
Read our local case study on succession planning in a family business with Eugene McKeever, Managing Director of the McKeever Hotel Group.
Running a family business - Mash Direct (video)
Martin and Tracy Hamilton, owners of Mash Direct, discuss how they run their family business.
Mash Direct is a family-owned farming and food production enterprise launched in 2004 in County Down, Northern Ireland. With six generations of farming expertise, Mash Direct provides quick-serve vegetable and potato dishes to local and UK markets.
Here Martin, Tracy and their sons Lance and Jack, explain how they use the skills of each family member to create an award-winning business.