Family-run Businesses
Introduction A family-run business is a firm that is controlled by a single family. The definition of a single family can be quite broad. They can involve parents, children and grandchildren, spouses, partners and their relatives, and even close family friends. Family-run businesses range in size from small enterprises to major UK corporations. For example, JCB, River Island and Specsavers are all family-run businesses.
Typically, for a business to be regarded as family-run, a single family has to own a controlling stake in a private company of at least 50%. In many cases, the family owns the business outright. Usually, at least one family member will be directly involved in the management or administration of a family-run business. However, in some cases, a business may be 100% owned by a single family, but the family may have little or no input in the day-to-day running of the business.
All legislation affecting business, covering issues such as tax, trading and employment, applies to family-run businesses. However, there are some specific additional considerations that apply.
This factsheet outlines key considerations affecting family-run businesses and explains the main advantages and disadvantages family-run businesses have compared with other firms.
Business structure A family-run business can take many forms, such as a sole trader employing other family members, a partnership or a limited liability partnership between family members, or a limited company in which certain family members are directors. When setting up an enterprise as a family-run business, it is important to choose the structure that best suits the business and the people involved. A more formal structure may make it easier to keep domestic finances and other issues separate from those of the business.
It is also important to think about which family members will take on particular roles, and who will bear the legal responsibility for the business. In a small family-run business, it is common for all members to be registered as partners or directors in order to share legal responsibility.
Many family businesses have a constitution or charter, which is usually drawn up after a collaborative process involving all relevant family members with assistance from a professional legal adviser. This formal document typically includes the aims and objectives, roles and responsibilities, and remuneration policy of the business, as well as setting out how disputes will be resolved. This type of document can help prevent conflict arising and can act as a practical guide to the running of the business.
Employing family members When employing family members, it is important to ensure that they are paid correctly, and not below the legal limit or by 'cash in hand'. Tax and National Insurance contributions must be paid, as with other employees, and the family member may be eligible for automatic enrolment into a pension scheme.
It is also important to ensure that family members are not given special treatment in terms of pay, promotion and working conditions, since this may lead to claims of discrimination from other employees.
In most cases, family members aged 16 and over who work in the family business must be paid at least the national minimum wage (NMW). An exception applies to family members who live in the family home. Family members who are company directors must also be paid at least the NMW if they have an employment contract with the family business.
Involving children When involving young family members in the running of the business, certain restrictions apply.
The minimum age at which an individual can be registered as a partner or director is 16. Children aged 13 and under cannot be employed, except in certain circumstances where a permit has been issued by the local authority in the area where the business is located. Children aged over 13 but under school-leaving age can only be employed in accordance with limits on the number of hours they can work and other prohibitions set nationally and by local by-laws, such as restrictions relating to street trading. The NMW does not apply to employees aged 15 and under.
Advantages of a family-run business A key advantage of a family-run business is that family members are likely to know each other very well and be aware of each other's strengths, weaknesses, skills and knowledge. This can make setting out roles and responsibilities much easier than in a traditional business setting.
Shared values, objectives and commitment can help give the business a competitive edge. Family members will usually have pride in their business and will do everything they can to make it a success, such as working extra hours or accepting lower pay. This shared commitment to succeed and overcome obstacles can be valuable, particularly during difficult trading times.
Long-term stability is another advantage of a family-run business. Family members are often in it for the long term, with a view to building a succession plan for future generations.
Many family businesses have worked hard to establish strong reputations and customer loyalty. This, combined with financial prudence, can make a family-run business well prepared to deal with economic downturns and difficult trading periods.
Disadvantages of a family-run business Family relationships are often very different from professional relationships, and can create problems within the business and restrict its success. Sometimes, it can be hard to separate domestic life from the business, and family issues or difficulties, such as relationship breakdown and divorce, can cause conflict in a business environment.
Employing family members can bring its own problems. In some cases, a family member may not be the best candidate for the role they are given. They may not have the knowledge or skills to carry out the role satisfactorily, but may be given the job out of family loyalty. In other cases, family members can regard a job within the family business as a job for life.
If a business employs non-family members alongside family members, a careful balance must be achieved. If non-family members feel that family members have undue influence or advantage, it can be divisive and cause problems within the business.
Family-run businesses may risk becoming set in their ways and resistant to change. The business may have been built up by previous generations, and family members may be reluctant to change something that has worked for a long period of time. Change is inevitable as trading conditions, trends and technologies evolve, and family-run businesses need to be geared up to accept and manage change.
Running a family business can mean that the whole family is reliant on a single source of income. If the business struggles or fails, this could have a devastating financial effect on the family.
Succession planning and generational issues According to research published by PwC in 2018 (www.pwc.co.uk/private-business-private-clients/family-business/survey-2018/key-findings.html), only 18% of family-run businesses had a formal, documented succession plan in place, and 40% had no succession plan at all. In a more recent PwC survey published in 2021, a quarter of respondents considered they had a 'robust' succession plan in place (www.pwc.co.uk/private-business-private-clients/assets/uk-family-business-outlook.pdf).
Succession or generational transfer can be the most life-threatening stage of a family-run business, and it is important to have plans in place for when it occurs. It is not sufficient merely to identify and name the successor or successors. Family business owners also need to ensure that successors are properly trained in how to run the business successfully. A gradual handover of control is the best way to achieve this.
Owners of family businesses are traditionally succeeded by their children. In some cases, there will be obvious candidates. However, in others, identifying the successor or successors may be problematic, and the child might not always be the best option for the business. In these cases, a non-family member or outsider may be better suited.
If owners plan to hand down the business to the next generation, they may need to choose between their children. Another important consideration is whether the family would benefit more if the business was sold rather than handed down. In each case, the owner should try to place the needs of the business, and the family as a whole, ahead of sentimentality.
It is important to consider the tax implications of succession and generational change. Capital gains tax or inheritance tax may be incurred on the transfer or sale of a business. Professional advice about potential tax liability should be sought, depending on individual circumstances, because rules and tax relief change frequently.
Hints and tips Family business owners should:
Create an atmosphere for open communication between family members involved in the business.
Recognise and appreciate that change can be necessary and beneficial.
Embrace outside influences and avoid the business becoming insular.
Employ family members in roles for which they have suitable skills and knowledge.
Consider recruiting non-family members in order to benefit from their new ideas, skills and perspective.
Plan early for exit or retirement to enable a gradual and successful handover or succession.
Contact Ashored for more information and support on Family-run Businesses.