BUSINESS: The Ultimate Resource

October 2004 Upgrade 24

GOOD SMALL BUSINESS

Running a family business
Getting started
The main advantage of a family-run business is that the ownership structure is built on lasting relationships of trust and commitment. These are usually essential to the successful running of a small business, and are often more easily achieved between members of the same family. Conversely, this kind of business can hit problems if irreconcilable disputes break out over the sharing of profits or the ownership of assets. Family ties can sometimes take precedence over the need to make objective and sometimes painful business decisions.

FAQs
Is there more than one type of family business? There are three principal forms in which a family business can operate: as a sole trader, a partnership, or a limited company. In the first example, a single family member would own the business but they would be able to employ relatives if required. A partnership could involve a husband and wife, a parent and child, or some similar combination, which would jointly own the assets of a business. You may decide to manage things on even terms or split responsibilities in some other way, but at the end of the day everybody would share equally in the profits or proceeds from selling the enterprise. The third option, which is also known as incorporation, requires the registration of a company, the appointment of directors and the issuing of shareholdings among the family membersand perhaps other investorstaking part. Family members may get involved in the practical running of the business, or they may choose simply to be shareholders and not necessarily do any work in the company. What difficulties could a family business experience? The informal relationships and culture of family life will stand in stark contrast to the formal demands of managing a business. A family unit may find it difficult to adjust to working together in a businesslike way. For example, if you choose to embark on this route youll need to be able to discuss and develop ideas effectively with participating family members. This can be hard for some people to get used to and conflicts can build up. Youll also need to be on guard against insular attitudes developing, a cultural resistance to change, and possibly inter-generational conflicts between older and younger family members. Everyone involved should clearly understand that being in business requires a commitment in time, energy, and money. Your entire familys way of life may be affected, so resentments and frustrations should be expected.

Bloomsbury Publishing Plc 2004

BUSINESS: The Ultimate Resource

October 2004 Upgrade 24

What strengths do family businesses have? Combining your knowledge, skills, and experience gained from other walks of life can prove very rewarding. If the right chemistry and balance of abilities can be found between the different individuals involved, this could enable your business to stand out from others and contribute towards its success. Many businesses gain their strength from family commitment and loyalty, resulting in high levels of trust, cooperation, and shared long-term goals. Getting the right mix of complementary temperaments and talents is important. Younger family members may, for instance, have a better grasp of technology and may be more comfortable with newer techniques for managing a business and adapting to change. Older members could bring with them the experience and authority to ensure good contacts and business relationships are established with suppliers and customers.

Making it happen
Before embarking on your venture a number of factors could help to determine what kind of structure you should adopt. The deciding factors should include: ! ! ! ! Can you arrange and secure adequate finance? Are you creating a trading, manufacturing, or service business? Will you be able to generate profits quickly, or will you have to sustain losses while youre establishing the business? Can you cope with the compliance requirements of a limited company?

Its vital to get good advice before putting together your business plan and you should spell out in detail the consequences of the decisions about the nature and structure of your enterprise to every family member involved. They should be aware of the legal and other implications of such things as directorships and share ownership, complying with tax, financial, and employment rules, buying or leasing premises, professional and employers liability insurance, and the myriad of other regulations that increasingly impact on businesses. Make a realistic assessment of your strengths and weaknesses as well as the long-term opportunities and threats you could face. List such things as the different abilities, educational backgrounds, and technical knowledge of your family members and anyone else you are planning to employ in the business. You should also consider your target markets; products and services; who your main competitors will be; what technological and other changes are taking place in your chosen sector; and the marketing and promotional techniques youll be using. Risks should be weighed against benefits. Its also essential to put in place from the outset monitoring and measuring systems that will allow you to track how well your business is performing and to review the progress its making. This will enable you to modify the targets and operating methods youll be using, to keep the business on course.

Bloomsbury Publishing Plc 2004

BUSINESS: The Ultimate Resource

October 2004 Upgrade 24

Regulations relating to a family-run business While most laws and regulations that apply to other kinds of businesses also affect a family business, there are some additional rules youll need to be aware of: ! ! ! ! Employment legislation applies to family companies who employ their directors, even if wages are not actually drawn. Copyright may have to be protected if a member dies. Patents, trademarks, and licenses need to be reviewed to prevent infringements. If you sell goods at less than the true value or take goods from the business for personal use this must be accounted for in your financial records. Farm tenancies can contain rights of succession. Land and property owned by individuals but used in the business may create problems if there is a change of ownership or usage.

What to avoid
Being unrealistic about how well you are doing In a family business there may be a tendency to take an unrealistic view of what is going on and how well its performing. If your spouse or children are involved theyll often end up working long hours without extra pay. This can give a false sense of how youre doing. You should therefore assess the true value of the time and effort being put in, and if possible compare how well youre performing against similar businesses. If your business manages to survive only at the expense of family members who are receiving poor wages, youre not doing justice to them or operating your enterprise on a sound basis. If they should fall ill or quit the business, would you be able to find anyone else to do the job for the same rate of pay? Family members can lack longer term commitment Dont be tempted to take too rosy a view of the commitment of family members. Those with less enthusiasm for the hard work involved, or who may be reluctant to take on some of the more mundane but necessary tasks, could end up causing you major problems. Relying too much on one person If you or one of your family has natural leadership qualities, and is likely to provide most of the drive behind the business, what happens if you retire or move on to pastures new? You should avoid over-dependency of this kind and build in greater adaptability. You should aim to retrain members of the business as things develop, so youll have the capacity to re-assign or replace individuals if necessary. Responding ineffectively to disputes In a family environment members can often have trouble defining what belongs to them and what is the property of the business. You need to put in place effective systems to monitor the finances of your business, and some form of mediation for handling disputes. Your bank manager or accountant can provide a dispassionate review in the event of any serious conflict over cash. There will be other kinds of disagreements for which youll have to establish some method of arbitration if matters threaten to get out of hand.
Bloomsbury Publishing Plc 2004

BUSINESS: The Ultimate Resource

October 2004 Upgrade 24

Recommended links
Family Business Magazine: www.familybusinessmagazine.com Family Business Quarterly: http://web.cba.neu.edu/fambiz/quarterly.htm

Bloomsbury Publishing Plc 2004