Providing more than nine million jobs throughout the UK and accounting for a quarter of GDP, family businesses underpin Britain’s economy. A well run family business can be one of the most productive and effective business structures; with the owners and managers receiving unequivocal support from family colleagues, an understanding of each other’s strengths and weaknesses and a shared outlook and plan to take the business forward.
However, when disagreements arise, the consequences can be devastating – not only for the business itself but also in terms of the relationship between the family members. Sadly, disputes about future ownership and exit plans, the general running of the business and each family member’s share of the profits are not uncommon.
Indeed, the nature of a family business itself can give rise to potential legal disputes in the future. Due to the way family businesses usually evolve, the shareholders in the company are most often also the directors; each involved in the day to day running of the business with an equal say in the decision-making process. Family businesses usually start out as a small concern, but can grow to be extremely successful and highly profitable organisations. Mars, Ford and L’Oreal all started life as family businesses and despite growing into Global brands, are still controlled by the founding families.
The close relationship between the directors, which can of course provide many benefits, can also present a risk; as business disputes can quickly become personal disagreements or ones which are taken personally and resonate beyond the boardroom.
Whilst the tendency in family businesses is to resist formalising the business relationship; relying instead on inherent trust; (the ‘because we’re family’ reasoning), the opposite approach most often better serves to protect the family members involved. Having a shareholders agreement not only lays out the fundamentals such as the basis upon which the company is managed, but also dividend rights and what would happen in the event of a shareholder’s death, illness or bankruptcy. It can also lay the foundations for a clear exit plan from the company or a way in which to properly manage shares being fragmented as they pass through generations, so that the actual control within the business remains with those actively involved, whilst other branches of the founding family may simply receive a limited return on their shareholding.
Despite the best intentions of all involved, life has a habit of getting in the way; throwing up unexpected eventualities that need to be mitigated. Having a legal framework to fall back on in such circumstances can offer protection and minimise risk to both the business and the family relationships involved.
If you need advice in relation to putting a shareholders agreement in place, or indeed any other legal matter relating to your business, please don’t hesitate to contact us for free initial advice.
By Debbie King, Company Law Solicitor in Lancashire