PKF Francis Clark: Keeping it in the family – the benefits of a family constitution
by Nick Farrant, PKF Francis Clark
When did you last have a family meeting? Have you agreed how the business will be governed? Do all the family members involved in the business have the same vision for the future as you? Have you thought about how you plan to hand the business on?
Too many owner managers are so focussed on the day to day running of the business that they fail to plan ahead, and this is perhaps one of the main reasons that while 70 per cent of businesses in the UK are family owned, only 10 per cent of them make it to a third generation.
If you haven’t established a formal protocol of decision making that will set standards and provide a means of conflict resolution, disagreements and tensions within the business grow.
Different generations have different desires, aspirations and motivations. Understanding this helps to distinguish the dynamics of selling to a family member or to a third party.
Equally, it is important to establish rules of governance that apply to everyone – family members and paid employees alike, and this includes documented expectations, rates of remuneration, grievance procedures and success measurements. Where the founding entrepreneur is the only one who knows the minutiae of the business finances and operations, sudden changes in circumstances can badly affect the business.
These scenarios can all be mitigated if owner/managers take time to plan; and if they are worried about the complexities of succession or exit strategies, help is at hand. Establishing a family constitution provides a framework of rules which governs behaviour. It should also address how communication should be dealt with, conflict resolved and provide a clear policy for the training and employment criteria for members of the family joining the business.
Each family and family business differs, but there are common themes that should be included in such a constitution including the vision of the business, measures of success, subsequent ownership, governance, provision for retirement and family employment policy. The best chance of a successful succession is where the new leaders are appropriately trained well in advance of taking over. Whilst the statistics are stacked against a family business continuing through successive generations, with the right planning, particularly with the support of a strong family constitution, there is no reason why more family businesses should not continue to grow and to flourish.