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Family business and business families

15 February 10

The opportunities for legal firms in providing advice to family businesses, as the Society investigates whether there is a gap between what is on offer and what such clients are looking for

by Ken McCracken

A case can be made for family businesses and business families being the largest unrecognised sector in the Scottish economy. Over 75% of companies in most developed economies are owned and controlled by an enterprising family, but how many law firms currently offer specialist services to these clients?

A large number of firms already provide a range of traditional services for family businesses, such as corporate, private client, wealth management, employment services and family law. However, since the family business field emerged in the 1980s it has developed new models that explain how family businesses differ from mainstream businesses, and these ideas have pushed the traditional boundaries of law, accounting, finance, management consulting and business education. This creates plenty of opportunities for the legal profession to expand its offering, which is particularly welcome at a time when economic conditions have led to a decline in other areas of practice.

Family business governance

One area with scope for expansion is family business governance. Family businesses are complex emotional and economic systems in which the needs of a family, the owners and the business have to be balanced. A “business first” approach to advice that ignores the needs of the family is of limited practical use, as is a “family first” approach that ignores the needs of the business.

The complexity of a family business increases over the generations because families grow, ownership fragments or changes form (e.g. trusts are set up), and the business expands, diversifies or contracts. All of this is predictable and thus can be planned for. What’s needed is creative and practical advice based on international, best practice in family business governance.

Family assembly

In a well run family business there must be a forum where the interests and concerns of the family can be discussed.

In a small family these discussions can occur spontaneously, whenever needed. However, as things become more complex the business of the family requires more thought and formality, a challenge that can be met by creating a family assembly.

A family assembly is a meeting of the family members with a stake in the business. Each family has to decide who can attend: is it restricted to owners, or are the wider family over an agreed age, and spouses/partners, to be invited? This decision will be influenced by what the family want from their assembly.

The assembly can create policies that govern areas where the distinct interests of family members and the business overlap, a common source of conflicts. For example a policy on employment and remuneration of family members can clarify in advance:

  • How can family members get a job in the family business?
  • What qualifications and experience will be needed for different roles?
  • How will their careers be developed, including appraisals?
  • What will they be paid?

Family policies can be created to govern other areas of importance to the family, like education of family members, distribution and use of family wealth, starting new ventures, family philanthropy, and media and PR (which can be particularly important for families whose name is also the business name or corporate brand).

Some families might want these policies to be set by the current owners, while others will take the view that since whatever is decided will affect the lives of a family, the next generation and spouses/partners should also have a say.

The family assembly can also play significant social and educational roles. Meetings can help to ensure that all family members are kept in touch with what’s happening in the lives of their relatives as well as in the family business. The next generation can start to learn about the business and to assess whether it will help them to fulfil their career aspirations, or thwart them.

All these activities can help to sustain the “glue” that binds a family to each other and their shared investment in the family business. This is fundamentally important because if the glue is allowed to dilute (which can happen as things become more complex), there eventually will come a point when it is not strong enough to hold the business together.

The family assembly is becoming a common feature of successful, multi-generational business families throughout the world. The role for lawyers is that the whole infrastructure needs to be created from scratch to suit each family, and then needs to be well run. As well as deciding who can attend the family assembly, there needs to be agreement about how it will be administered, how often it will meet, what formality is required to convene and run meetings, and how formal decisions will be taken. All of this, potentially, is meat and drink for the legal profession.

Conflict resolution

The only remarkable thing about conflict in family businesses is that it is thought to be remarkable. In every family business there is only so much time, money, love and opportunity to share around and the competition for these resources among all those with a stake in the business will naturally lead to anxiety, which sometimes breaks out in conflict. Conflict is a structural reality in family businesses, and the question is, what can lawyers do to help?

Part of the answer requires a better understanding of the nature of conflict, as expressed by two family business owners:

  • “Conflict in family businesses is much more personal than in other types of business. Conflicts with your family threaten your own sense of identity and your relationships with your relatives. There is so much at stake and you can’t just hand in your notice and leave.”
  • “Sometimes there is not a solution and recognising this can be a massive relief. It’s more practical to live with it than try to beat it.”

Disputes in business families are not between “independent” parties. The parties cannot easily walk away after a dispute, because of family relationships and the other ties that bind – like a stake in the family business. This poses a problem for traditional dispute resolution techniques: even those that seek a win-win outcome assume that the parties can accept a compromise because afterwards they can each “walk away”.

The traditional approach also assumes that the parties want a resolution. In reality, sometimes a family sustains apparent “disputes” as a technique for avoiding or delaying the bigger discussions. In other words the apparent conflict is a symptom of bigger issues, on which the family needs urgent advice. Lawyers can help clients to understand and deal with this, rather than resorting to dispute resolution techniques.

What’s needed?

Governance and conflict resolution are just two areas where lawyers could offer new services for family business clients. However, this requires changes that go beyond repackaging traditional services and presenting them in a family business wrapper.

The dominant business model for the professions might have to change. The conventional wisdom has been that what lawyers need to do is develop different specialisms, which tend to focus on narrow areas of the clients’ lives. It is obviously important for every family business client to receive the best technical advice available, but this approach can also result in the client receiving fragmented advice. Advisers who identify technical issues that reflect their technical specialism and offer technical solutions from this perspective, leave the client with the challenge of making sense of the complex, big picture, which is the reality in every family business.

A more client-centric approach is required. Business families do not identify their lives and relationships as “a series of technical problems”. The business owner who is also the managing director, a spouse, sibling, parent, grandparent and philanthropist, seeks help with how to make sense of all these different roles and advice as to how to look after the welfare of all the interests for which he or she feels responsible. In order to develop family business as a new area, lawyers first need to clamber out of their specialist silos and recombine their technical skills in service of the needs of their family business clients.

The profession could start drawing on the standards of international best practice that have been established for family businesses by organisations like the Scottish Family Business Association and then introduce these as part of legal education and ongoing professional training.

The family business world accepts that advising clients is a multi-disciplinary activity, so not only do lawyers in the same firm need to collaborate more effectively, there is also a need for inter-disciplinary collaboration. This could well lead to new types of firm who offer family businesses a joined-up service to help look after all the challenges of running the business of the family.

Like any new market there will be many challenges in developing services for family businesses, but this area will appeal to firms who want to move forward creatively, after coming to terms with the fact that the recovery from this recession will not result in the legal profession returning to the way things were before.

Ken McCracken is a partner in the Family Business and Family Office group in Wright Johnston & Mackenzie LLP. He is also a consultant with Family Business Solutions Ltd, an international consulting and teaching organisation that works with enterprising families, family businesses and family offices. www.familybusinesssolutions.co.uk


New Forum: a collaboration opportunity

The new Forum for Family Business Advisers (FFBA) is a good example of the type of multi-disciplinary effort needed to expand the services available to family businesses, Ken McCracken writes.

The FFBA is being hosted by the Hunter Centre for Entrepreneurship at the University of Strathclyde Business School, with support from the Law Society of Scotland, the Society of Trust and Estate Practitioners, the Association of Certified Chartered Accountants, the Entrepreneurial Exchange, and the Scottish Family Business Association (SFBA).

The Forum will offer multi-disciplinary education and networking for advisers from different professions who want to develop a specialism in family businesses. Initially the focus will be on increasing awareness and understanding of international best practice. In due course advisers from each profession participating in the Forum will be invited to return and share the knowledge and experience they are developing through working with family businesses. This will improve and refresh the overall quality of education and collaboration in the Forum.

Laura Malcolm, solicitor, professional support team at the Society, said, “We’re delighted to be working with the SFBA and FFBA and see collaboration with other professional bodies as a way to refine the range of relevant skills which the legal profession can bring to family business clients. In the current economic climate it is particularly valuable to be able to offer our members an awareness of the business development opportunities from these initiatives.

“We hope our members will take the opportunity to engage with the training that is to be provided at the FFBA in order to build links with this large and vital sector of the economy.”

The initial meeting to explain the FFBA in more detail will be in The Hunter Centre, Livingstone Tower (13th floor), 26 Richmond Street, Glasgow on 19 April 2010 from 4-7pm. Anyone interested in attending or seeking more information about the Forum should contact Caroline Laurie at the Centre on 0141 552 4400.

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