Planning for the future is a family affair

Research suggests that almost 100,000 smaller businesses – including many family-run enterprises – will close their doors for good in 2015.

In 2013, a survey published by the Department for Business, Innovation & Skills found that nine per cent of small and medium-sized enterprises (SMEs) anticipated that their business would close over the next five years.

With around 5.2 million SMEs in the UK, according to the Federation of Small Businesses, that equates to 468,000 firms shutting down in that time, the equivalent of 93,600 each year.

The figure suggests that a great many family business and other SMEs are failing to plan ahead for the time when they want to call it a day, despite the fact that UK demographics suggest a significant number are led by baby boomers in their 50s and 60s, who are likely to be thinking seriously about retirement in the next few years.

The issue is a particularly significant one for family businesses. According to research carried out by the Family Business Institute in the US, about 30 per cent of family and businesses survive into the second generation, 12 per cent remain viable into the third and only about three per cent continue into the fourth generation or beyond.

Starting succession planning as far ahead as possible before the owner’s desired exit or retirement date is a good place to start to ensure the business’s survival, to allow consideration of issues including who will take over the enterprise, whether they have the right skills, or need to develop these, and the most appropriate structure and governance arrangements.

A lot depends on how many people will have an interest in the business or be actively involved in running it on a day-to-day basis, with different options for structuring the business including:

  • ownership and control rests with one person
  • ownership and control is shared between a limited number of people, all actively involved in running the business, but whose interest in it may vary
  • there are multiple owners, some active in the business and others who are not directly involved but who draw dividend income from it.

While the nature of family firms sets them apart from enterprises where those owning and running them have a less “intimate” relationship with the business and each other, they remain commercial organisations and current and future leaders need to be hard-headed about the way they operate.

There are a range of options for putting the governance of a family business on a more formal footing, to help avoid the risk of damaging disagreements and disputes. These will vary depending on the structure of the business but could include partnership agreements, shareholder agreements, family charters, trusts and manifestos.

Every situation is as unique as the business itself and it can be tough for family members to step back and take an objective look at what’s best for the business, which is the key consideration.

At Palmers, we are experienced in working with family businesses and understand the challenges involved in succession planning. We can provide expert, tailored advice to assist in the planning process, clarify different types of governance arrangements and provide ongoing advice as the business moves forward. For more information, please contact BJ Chong.