'Family Businesses and family members often need someone professional and experienced as a sounding board for ideas and concerns'

Most founders of owner-managed businesses want to hand over the firm they have created to their family, yet only one in ten draw up a succession plan. The result is that hundreds of thriving businesses end up being brought to their knees.

Family Businesses
Family-owned firms are the backbone of the UK construction industry, accounting for 75 per cent of all businesses, 50 per cent of all jobs, and generating half the industry's annual workload. Yet fewer than a third survive through to the second generation and only a handful make it beyond that.

There are a multitude of reasons for this disastrous state of affairs. All too often owners assume that their offspring want to take over the company when they retire, yet when it comes to it, many cannot face stepping down and their children lack the skills to step into the hot seat. Other hazards to he negotiated include major family shareholders wanting to sell their shares, thus forcing the company into a sale, while emotional ties, favouritism and sibling rivalry in particular, can wreak havoc at every turn.

Owner-managed businesses are all around, from plant hire through to social housing and marine work. Other areas such as ready-mixed concrete, curtain walling installation and M&E specialist sub-contracting are also home for numerous former employees who struck out on their own, building up their own business. But what starts well so often gets blown off course: such businesses face problems the minute other family members are brought in. No surprise, really, given that families tend to be introspective, emotionally-oriented and wary of change. Businesses, on the other hand, need to be outward-looking, objective and willing to embrace change.

Family membership implies an unconditional acceptance of the individual, whereas in business, acceptance depends on performance. So where does it start to go wrong.? When ownership and management is concentrated among a small group of people, most difficulties result from conflicts between personal and commercial objectives. The task is to identify the potential conflicts between family, ownership and management goals.

Even where a dispute has already arisen, answers can be found if the parties are committed to finding a solution. It is never too late to safeguard the interests of the business or the family."

Succession Planning
As a business leader, you are used to being in control; indeed, your ability to control events is part of what makes you a leader. Planning for succession, the process of passing control to others, is therefore likely to be unfamiliar and difficult territory.

The first question to ask is whether the business will be sustainable without you - some enterprises are so dependent on the qualities of a single individual that succession is not possible. If the business can be passed on, you will need to tackle a range of issues. For example, you may hope that your children will take over; but do they have both the aptitude and inclination to step into your shoes? Which child is best suited to lead the business after you've gone? Will you need to bring in management talent from outside the family to fill any gaps?

Putting the plan in writing will help to ensure that difficult issues are confronted head on, and that everyone, non-family executives as well as family members, know where they stand in relation to the business. The plan should include criteria for selecting the next generation of management, details of how successors will be prepared for their roles and contingency arrangements to cater for unforeseen events.

Remuneration Planning
To avoid undermining morale and causing resentment among non-family executives, employees and other family members, it is usually best to pay family members a basic salary, reflecting the market rate for the job, and a bonus, reflecting performance against predetermined objectives - just as you would for a non-family executive.

Equity Ownership by Family Members
Family shareholders need to feel that they benefit financially from having equity in the business, either through dividends or because they are able to sell their shares if they choose. If ownership does not translate into reward, they could become mistrustful and trigger conflict.

As a starting point, ensure that the ownership structure is clearly defined, and establish a policy for the transfer, acquisition and disposal of shares together with an equitable method of valuing them. The issues should be openly discussed with spouses and children, they are more likely to support your approach if they have been actively involved in its development.

While a stable dividend pay-out is a desirable aim, you need to balance the needs of the shareholders with those of the business. To help ensure that the expectations of the shareholders' continue to be realistic, it is wise to link dividends to profits.

Family Members not involved in the Business
The majority, possibly all, of your wealth could be tied up in the business. When it comes to providing an inheritance for your children, you may feel that the only way to treat them fairly is to bequeath an equal number of shares, whether or not they are involved. Often such good intentions lead to conflict and disunity. Members of the next generation who are part of the management team may come to resent interference from those who are not; while the non-active members may feel that the business is not being run for their benefit.

As the business matures, the number of non-active members is likely to multiple, as will the problems. It may be possible, however, to transfer wealth other than by giving shares. For example, a proportion of the value in the business could be released by selling part of it to a third party or through a flotation. An alternative approach is to create two classes of shares, one with restricted voting rights, to enable non-active members to benefit from the business without allowing them to intervene in day to day management.

Introducing and Rewarding Non-Family Executives
Any senior executive joining a family business from the outside is likely to be apprehensive. However much family members may say they value the outsider's skills, he will be concerned about the family's willingness to accept change.

To recruit and retain high quality managerial talent, the family must provide assurances that the new executive will play a key role in running the enterprise. One way to achieve this is to create a rewards package which is directly linked to the performance of the business. There are numerous methods available.

Retirement and Estate Planning
It makes sense to plan your retirement, doing so will enable you to minimise inheritance tax and ensure that there is a smooth transition to the next generation of management. However, you may be concerned that passing on wealth before you retire could jeopardise your own financial security. Making provision for later life through, for example, pension plans is one way to ensure that the path to succession isn't blocked by financial worries.

Estate planning is a continuing process, review the current arrangements whenever there is a major family event, such as a birth, death or remarriage, when there are changes in tax law, and every three to four years as a matter of course.

Bringing Family Members into the Business
As a general rule, family members should come into the business with 2-5 years' experience of the outside world. This will enable them to gain self-confidence and a sense of independence, and to bring a wider perspective to the family business. It is also likely to enhance their credibility in the eyes of non-family executives and employees.

Financial Structure
Financing is often a crucial issue for owner-managed businesses. In addition to meeting day to day liquidity requirements, you may need to fund capital investment projects and provide returns to family shareholders.

Owners are often tempted to fund these calls through the business's own resources, in order to avoid being beholden to outside investors or the bank. However, the effect of this can be to starve the business of the investment needed to maintain competitiveness or fuel growth.

Preserving Wealth
It is likely that you will have accumulated wealth as your business has matured. How can you best ensure that this wealth is conserved? A good principle is to create wealth which is separate from the business: this is a good reason why you might consider selling a proportion of the equity to a private investor or floating the company. By developing an asset base which is not reliant on the fortunes of the business, you will be spreading risk and paving the way for your successors to take the helm.

The Family Creed
One way to help prevent or resolve conflict is to develop a family creed, a written distillation of the family's core values and principles, underpinning how the business is to be run. The creed might cover such issues as family members' obligations to each other, ownership responsibilities, attitude to risk and commitment to the business over the longer term.

To begin with, the family creed may seem to be an exercise in stating the obvious, in practice, however, it will help to identify potential areas of conflict and will provide a framework for taking decisions and managing personal relationships within the business. The document should be reviewed at least annually.

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