Pattrick Smellie gives advice on how to hold a family business together when times get tough.
1. Get formal arrangements in place early. Just as partners in a small business should have a shareholders’ agreement from day one, so the creation of a family charter or similar document setting out the principles of the relationship between the family and its business can be a vital tool when things go wrong.
2. In heated situations, exploit the passage of time. When there’s emotion and disagreement within the family, don’t expect to solve everything all at once. Space out meetings to give time for everyone to reflect. No matter what you disagree on, you still probably want to be able to spend Christmas together.
3. Think of the business as another member of the family. None of you want to kill it (hopefully), but there is always a chance it can be loved to death.
4. Abandon your own concept of “fairness” in favour of an agreement among all affected family members of what’s fair. It often turns out that multiple wishes can be accommodated at once.
5. Make working in the family business a privilege, not a right, and be clear what qualifications and efforts a family member will need to make if they’re to come on board.
6. Be realistic that family shareholders are more powerful than ordinary shareholders. A 5% shareholder in a public company is “essentially along for the ride”, says PwC’s Owen Gibson. “But if my auntie’s using the dividends to pay school fees, then that’s going to mean much more to me if that’s going to be put at risk.”
7. In most companies, the chief executive’s role is a lonely one. In a family business, it may not be quite lonely enough.
8. Well-organised family trusts and wills are vital for a smooth transition from one generation to the next. Without them, a soundly functioning business can be tipped into disarray.
Remember: family trusts last only 80 years – a little more than two generations.
9. A family charter can be a great way to decide, first, what the family’s values and expectations are, and then apply them to the business. Keep wills and trust documents in the charter. Review and update it systematically.
If the family business is your main investment – especially if you’re not involved in it – consider reducing your exposure by diversifying.
10. And if you do that, be patient: freeing up cash for you may require the business to borrow, which takes time, negotiation and planning. Don’t expect the business to borrow so much to meet your needs that it might fail.
11. Sometimes you’ll have to go with the flow. Says Family Business Central’s Philip Pryor: “There are times when the matriarch or patriarch will say: ‘Actually, I want it to be this way’, and, frankly, I do believe they have that right.”
12. Transparency is vital. “Lack of transparency leads to conspiracy theories,” says Pryor. “We think Trump and his backers are full of conspiracy theories. You ain’t seen nothing until you see a family.”
13. Have the conversations that need to be had. “We all tend to catastrophise, but those conversations are never as bad as we think.”
This article was first published in the June 23, 2018 issue of the New Zealand Listener.