With just under 5 million family businesses currently operating in the UK, the role they play in the economy cannot be underestimated. Often described as the backbone, they boast in the region of 12.2m employees in total, generate 26% of UK GDP and contribute over £149 billion in tax each year.
It’s a proven success model. In fact, 88% of all UK private sector firms are family-owned.
It’s also a challenging business model.
Setting up a new business on your own is unlikely to be stress-free, but throw in the potential for family politics and it’s almost certainly going to fuel a fire at some point.
There’s no doubt that shared goals, motivation, common purpose, mutual trust and innate family values are all indisputable benefits. But it only takes one of these to break down, with just one family member (or for someone to dare mention money and shares) and things can quickly turn sour.
The secret is to be aware of this from the outset. Outline the potential challenges in advance and agree between all family members and key stakeholders the way in which these are going to be tackled. There should be a common understanding about how the interests of the family and the business relate as well as an agreement on how separate the two should remain – it’s a fine art of juggling.
And communication is key to it all.
Here’s our take on some family business essentials when preparing for growth:
- Key stakeholders
Be clear about who the main players in the business are.These will include those with an influential day-to-day role and those with just a vested interest in its success.
Detailing investments and shares should therefore be a formal process from the outset; a family isn’t a family unless everyone protects what’s theirs.
A strong line-up for your management team is a must and will almost certainly come under scrutiny from any future investors. Go for a good mix of family skills and external expertise to make sure strategic decisions are exactly that.
- The strategy
All businesses should start with an end goal in place. Make sure all stakeholders are aware of said strategy and how it will deliver success. You need to achieve a shared vision and obtain full buy-in to the business you are looking to create.
A regular family meeting is advisable to give the opportunity for the strategy to be assessed and reviewed; it’s important that all family members feel their aspirations will be met.
And that’s true for the exit plan too. Aligned thinking is essential when it comes to life after the current family business. Will it remain in the family or will it be sold? What does the succession plan look like?
- Business plan
Don’t confuse a document mapping out your key milestones with a winning funding business plan.
A small business that doesn’t require external funding at some point is an extremely lucky one. But for the main, investment will be sought to support various stages of growth. The more you plan for this, the more successful your funding bid is likely to be.
Your business plan should show confidence in your management team, present a business that is scalable, prove the potential for future profit and demonstrate an understanding of what investors are looking for.
- The hurdles
Operational challenges are common amongst family businesses, with the ultimate thorn in the side being cashflow. Short or long-term funding solutions can provide the answer, but ahead of this, consider your credit management processes.
A strong cashflow starts with good credit management and it’s worth the effort to get it right.
External investment is not always easy to come by, especially as most family businesses would be classed as SMEs – making them nothing but risky for lots of investors.
Being aware of potential (maybe unexpected) costs is also worthwhile because moving to new premises, renovating existing ones, taking on new staff or buying extra stock are all a large drain on potentially limited working capital
- Family wealth
Make sure that the business is not dependent on the wealth of just one (or a few) family members; it is not strategically sound for a limited few to over-commit. Family wealth should rather be spread across a number of different investments to mitigate the overall risk.
Of course, investment from within the family should not be turned away and offering security against those loans can be a way of protecting individual family members.
Maximising family wealth is also possible with strategies around pensions and dividend policies. This gives people valuable and tax-efficient incentives of what they can expect if things go to plan.
In summary, a good family business should be built around clear principles and processes, making it easier for everyone to build trust and work as a team. Conflicts tend to occur when people aren’t communicating effectively. But, with these few essentials front of mind, the interests of the business should be everyone’s main focus.
Any business environment is, however, subject to change and leading your business through various growth stages will always be an evolving process. At Pegasus, we understand the challenges for family businesses and have years of expertise in putting the best plans and funding solutions in place to overcome them.
If you’d like to know more about the role we could play in your family business, then give us a call on 0203 327 0567 or email [email protected]