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Think about this before going into business with family

Wicus Van Biljon

06-03-24

Things you should know about running a family business. Senior with two sons.Thinking of starting a family business?

UK family businesses employ 13.9 million people, generate £1.7 trillion in turnover, and contribute £575 million gross value added (GVA) to UK GDP.

(Source: IFB Research Foundation, The State of the Nation – The UK Family Business Sector 2021-22).

It is reported in the UK that 90% of all private businesses fall into the ‘family-owned’ category and play a vital role in our economy, leading the way in driving growth and employment.

According to a PwC Global Family Business Survey conducted in 2023, UK family businesses are seeing the largest growth increase in 15 years, and nearly three-quarters (73%) of family businesses that experienced double-digit growth over the last financial year are those with a clear set of family values and an agreed purpose.

But before you jump headfirst into a new family venture, it’s important to be aware of some common pitfalls.

Challenges of a family-run business 

Running your own business comes with many challenges, but being part of a family-run business brings further underlying obstacles and potentially more pressures.

These are the most common issues we come across.

Work life balance – being immersed in the business 24/7 

Establishing clear boundaries between work and home life is essential in maintaining a healthy work-life balance in a family-owned business.

So often, business owners will leave work only to discuss work issues over the dinner table.

Sticking to normal working hours where possible and leaving work behind allows you to switch off and make time for your family.

Ineffective planning and communication 

Many owners of family businesses feel under pressure to adapt or change, yet due to the nature of living and working together, key issues are often not discussed in detail or in a structured fashion; therefore, change is an impossible feat – you cannot make positive changes if you don’t communicate the aspects of your business operations that are not working. However, You only need to make a few small changes to ensure your business stays competitive and sustainable for the foreseeable future.

One minor but significant change to your business could be to hold structured, quarterly shareholder meetings to review the business growth plans and assess these against the overall business strategy. Analysing your financial information monthly, not just as a family, but involving your key managers and team leaders will help enormously, too. Ensure you document any actions, allocate responsibility, and set agreed time frames.

Board and management meetings shouldn’t be discussions that you hold over the dinner table!

Generation gap –dealing with family relationships in the workplace 

Many family businesses have been passed on through the generations, resulting in many different generations working together. Each family member will probably have very different views and management styles.

Older family members may be reluctant to change things, whilst younger members are impatient for change.

For a business to evolve and succeed in a changing landscape, Getting everyone on the same page and handling any differences professionally is essential.

Not the right people in the right roles 

Workforces comprised of a high proportion of family members will almost certainly result in individuals not being in the right roles. Perhaps they have been employed just because they are a family member and not due to their skills or suitability for a specific role.

Consider recruiting non-family members if you have a skills shortage that may hamper your future growth.

Attracting key skills and talent must be one of the main focuses for future business survival. So, ensure your marketing, brand, and reputation are appealing, not just to your customers but also to future employees.

Not being a family member within a family business can be perceived as a barrier to working for you, so consider how to attract and retain talent. What opportunities could you offer for further personal development, such as support through one of the new degree-level apprentices?

Consider how you could share the rewards through bonus schemes or options based on business performance. The more diversity you can bring into the management and business, the more likely you will have a more robust and higher-performing business. So, do consider looking outside the family for critical roles.

Are family businesses more likely to succeed or fail? 

Family firms are not necessarily more likely to succeed than non-family-run businesses. As management consultants working exclusively with SMEs, we do tend to come across family-owned and run companies that would be more likely to survive long-term.

This is mainly because many family businesses are not necessarily striving to be the most profitable. Instead, they are run within markets and at a level to sustain the family, where independent organisations can be more aggressive regarding profit margins and market share.

That’s not to say that family-run businesses cannot run with tremendous success. Families run some of the most successful companies in the world.

Benefits of going into business with your parents

Trust is the most significant benefit of going into business with your parents. Ultimately, you have known them for longer than anyone else, giving you the confidence to have a working relationship with them. Equally, this can also have its downfalls as you will also know their shortcomings.

We often find that parent and offspring businesses benefit from their close family relationships as they complement each other’s strengths and have a shared outlook and focus for the company.

Experience is another key advantage of going into business with your parents. Parents often bring experience from living and working through issues such as economic cycles or similar environmental factors that can challenge small businesses.

Raising finance for a family business 

We often find that small business owners tend to identify what they want for funding or investment and then build a plan in support of this, but we don’t believe this is the right approach.

If you are seeking finance, you must show that you have a clear strategic plan for your specific business. To help, here are eight simple considerations for you:

  1. What Products or services are you providing?
  2. Who will buy them no, the future, and why are they being bought?
  3. What is the market profile and perceived competition?
  4. Consider the impact of STEP factors (Social, Technological, Economic, Political) on your business?
  5. Who will be doing what within the business – is the culture based on the values and vision?
  6. Do you have detailed financial figures to demonstrate sustainable, profitable growth?
  7. What investment or funding is required, and what is the most efficient combination that meets the needs of the business and its owners?
  8. What does the business want to be famous for?

You will need to give up a stake in your business in return for cash coming in, and your investor will expect to see a return on their investment, whilst that may not be the priority for you, the business owner.

By setting out what you want to achieve first and documenting what that involves, you may find that investment may not be needed.

Succession Planning 

Succession planning is a subject which is skirted around or regarded as taboo; however, as a family business, it is vital to have the exit discussion with your next generation sooner rather than later.

Younger family members and staff will wonder when the senior family members will step down.

We recently supported a local family business with succession planning; the founder had recently turned 65, and at the time, his wife, son, and daughter worked in the industry, along with another 16 employees.

When we facilitated the exit discussion during a shareholder meeting, some family members divulged that they had no intention of staying in the business for the long term.

This wasn’t because it was a bad business; they were very successful; it was because the younger generation wanted to go off and try something different.

While the business owner was disappointed, we are now supporting the family in securing the structure to sell the business as a going concern.

Should selling the family business to either the highest bidder or to a management buyout be your option, the critical aspect is managing yourselves out of the company.

Managing yourself out of the company takes time and can be challenging, not just in delegating tasks to others (particularly non-family members) but also in transferring all those long-term and trustworthy relationships you have with your customers and suppliers.

Start by drafting a future company structure and decide the key roles and responsibilities for these. For each role, determine the essential skills, knowledge and attributes required to fulfil those roles effectively. Rather than pushing square pegs into round holes, decide who within your current team you can develop and mould into those new roles. If you have gaps, you may need to recruit.

The family business we mentioned has managed to secure many of the roles internally over the last 18 months, promoting two existing employees to managers. It has even passed over the responsibility of their family business bank account to a non-family member.

Their one main issue, however, is not having someone to take the reins of the business, and that’s a process we are working on together over the next few months.

Finally, ensure you seek external professional advice regarding the changes you decide to implement and collectively agree on a plan; continually work on it together and towards the goal of being able to step down.

How to build a valuable family business 

Whether you are looking at a succession or growth strategy, it is essential to build the value of your business so it is more attractive to potential investors and buyers. When you build value in your company, you will have a more sellable business.

Business Doctors - Value Builder Score Find out how valuable your business is

Our online Value Builder survey will unlock your current business value; you will also get a 28-page report with recommendations for improvement.

We also run Freedom seminars and workshops that focus on building value in your business so you can have the freedom to choose whether to stay, pass on or exit.

Summary

We have been working with family run businesses for the past 20 years so we fully understand the challenges and the growth potential.

If you need a sounding board, confidante, or facilitator to help you manage some of the issues associated with family-run businesses, please get in touch.

References:

Breaking Big was written by Co-Founder Matt Levington and includes many anecdotes from working with family run businesses.

View our case studies for more information:

South Manchester family firm increase turnover by 40% and create eight jobs in just 12 months.

Manufacturer of arts and crafts items for the education sector, has achieved a 28 percent increase in turnover and is in line to break the £5 million barrier.

Author: Wicus Van Biljon

I'm well aware of the challenges facing SMEs today, and what it's like to be caught in the owner's trap.

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