When we usually think of ‘business’, we naturally think of big business, household-name brands or headline-grabbing FTSE100 companies.
And yet the backbone of British business is not the major multinational, but the family-owned business. Family-owned businesses comprise two-thirds of the total of UK SMEs, according to research by the Institute for Family Business, generating 35% of private sector revenue, or £1.1trn.
There are family-owned businesses in practically every sector, but certain patterns and challenges are common throughout, and a key one is the issue of succession.
"There's that old saying about 'clogs to clogs in three generations'," says Caroline Hayward, intellectual property (IP) partner at Trowers & Hamlins, adding that, "IP is one of the issues most- overlooked and which can cause most problems down the track for family businesses."
"Some bright chap with nothing – the first set of clogs – sets up the company initially, becomes incredibly successful, passes it onto his kids who respect what he's done and do a great job growing the company, but then their kids have only ever known wealth and don't understand the work ethic which made the company, which then declines and then the third generation end up back to clogs!" she says.
Corporate partner and Islamic finance specialist Tony Poole also sees successful succession as one of the major challenges for family businesses. "People often leave it too late to think properly about it, or make assumptions that one child or other is going to take it over, and they may not be that interested or may not be the best person for the job," he says.
"The figures are quite stark," he adds, echoing Hayward's point. "A survey by PWC found that 48% of family firms in the UK currently have yet to identify a successor, and estimated that 172,000 family businesses a year leave family control entirely because they fail to resolve the succession issue."
"Problems are also created if the founder wants to step back from the day-to-day management of the business, maybe to give the kids a chance to take on management responsibility, but then wants stay on in some capacity," adds Poole. "That can cause all sorts of tensions. I would advise not sharing out the equity too quickly and certainly not losing control of the company until you're ready to hand over entirely."
"Beyond that, where there are a number of shareholders, all the children, for instance, you want to make sure there are appropriate measures in place such as powers of attorney, to ensure someone can take over if something bad happens to one of the shareholders, or 'drag-rights', so that a minority shareholder can't just dig their heels in and prevent a deal that all the other shareholders might want," he says.
Creating a sustainable and successful business is problematic whatever the structure, but Adrian Jones, corporate partner in the firm's London office, adds that the nature of growth in family businesses can also present major challenges.
"Very often you'll get a situation where the business has started quite informally," he says. "It is started and runs successfully for a number of years on that basis, and it's only when it comes to an inflexion point – say where the business is looking for external investors, or perhaps a sale to a larger business or outside investor – that you discover that everything is all over the place. There are no written contracts, IP rights aren't registered or are registered to a founder, multiple premises and other assets have different ownership."
"Some people think 'oh, we're family, we work on trust and don't need contracts'," agrees Caroline Hayward. "But you need contracts in place, and which are the same as the contract you would have, as if, this is not your brother but some external guy you didn't really know."
She relates the tale of a family and family friends company "which in 1993 was organised on the basis of trust and written agreements which were little more than a handshake”, an informality which led to a dispute which went on for 12 years. “It was like a grumbling appendix," she says.
"I'm sure people would say 'oh, you're lawyers, of course you’re going to say take advice early'," she adds, "but it's much easier and cheaper to put proper structures in place at the outset than sort out the mess down the track." "It's going to be very difficult to sell a business in the midst of litigation, so you need to start thinking about getting everything in order a good year before you're going to sell."
Who owns your IP?
Intellectual property can be a tricky area for the family business. For a start, who owns the name?
"If your business is John Jones Ltd, set up by your grandfather John Jones way back when," says Caroline Hayward, "and then the grandson – also John Jones – wants to break off and set up his own business as John Jones Ltd, you probably have a problem. That's why, and it's sad to say this, trust is never enough when it comes to family. You just can't rely on situations like this not cropping up sometime in the future."
"IP ownership in itself can also be an issue," says Adrian Jones. "If you're a software company in particular, it's wise to check whether some of your programs were written by people who were contractors when they worked for you. If that was the case, then you might not own the IP. Copyright originates and remains with the author, unless it is assigned."
"IP is often the last thing a family business might think about," adds Hayward. "They've got enough to be getting on with, keeping the business running. But it's vital to get everything registered that you need registered, and make sure you're clear on ownership. You don't want to have to be sorting that out in the midst of succession or sale."
