Advising the Family Owned BusinessFROM £80.00
Offers practical advice to lawyers on dealing with family business clients
A key challenge is that professionals increasingly operate from ever narrower silos of specialisation, whereas the needs of their family business clients cross many practice areas. The book is intended to provide practitioners with an overview of family business issues from practice areas adjacent to their own, to help them offer rounded advice to family business clients. Coverage includes:
- An Introduction to Family Business Dynamics
- Management and Ownership Succession
- Family Business Governance
- Family Business and Employment
- Family Partnerships
- The Family Name
- Selling the Family Business
- Family Business Trusts
- Marriage and the Family Business
- Family Business Disputes
- The Family Business and Property
- Business Issues
- Family and Business Overlap
- The family dimension – Just Family Business?
- Family Ownership
- Non Family Owners
- Family Business Leadership
- Employee Ownership
- Family Business Practice
The support and encouragement of friends and family has been invaluable, especially my wife Susan, without whose long term amnesty on decorating projects the book may never have been written.
Most of the thinking included in the book is the result of countless hours of discussions with family business clients and colleagues from across the family business movement. In terms of both the frequency and depth of discussion, the time spent with my former colleague Emma Rudge stands out, closely followed by other members of the Veale Wasbrough Vizards family business team and colleagues from the International Centre for Families in Business (ICFIB) network. To the greatest extent possible sources have been acknowledged in the body of the book. However it would not be possible to identify, much less list, all of the source and influences that have helped me to arrive at the current stage of my family business journey.
More precisely a considerable number of colleagues have made direct and extremely valuable contributions to the book itself, for example by producing first drafts the legal or technical content forming part of the chapters, reviewing drafts of other chapters or in some cases both. Unless otherwise stated these are past or present colleagues from Veale Wasbrough Vizards. In detail these are:
Part A – The Family Owned Business and its Dynamics
David Pierce of D R Pierce Consultancy Limited and John Tucker of the Family Business Consultancy for the contributions they have each made to these chapters including reviewing and commentating on various drafts.
Part B – Business Matters
David Pierce who wrote chapter 4 on Tax Basics and the Family Business Structure and did so whilst struggling with serious health issues, together with his former partner Ruth Dooley of Hazlewoods accountants and Emma Bradley tax partner of Veale Wasbrough Vizards, who reviewed this chapter.
Various members of the employment team at Veale Wasbrough Vizards contributed text for chapters 5 and 6 (Employing Family Members and Non-family Employees, respectively) and/or reviewed later drafts of these chapters, including, Victoria McMeel, Paul Esmiley, Matthew Welch, Michael Halsey, Sarah Want and Jessica Ryan.
Thanks are due to Professor Andrew Keay of Leeds University for his review of and helpful comments in relation to chapter 8 (Director's Duties) also to Emma Rudge and Richard Hiscoke for their work on this.
Paula Williams and Steve McGuigan wrote the legal content for chapters 9 and 10 (The Name above the Door and Property and the Family Firm Respectively). David Pierce also provided tax and commercial comments on aspects of the latter chapter.
Part C - Ownership
So far as the section on ownership is concerned, once again David Pierce contributed comments on commercial and valuation points for chapter 12 (Selling the Family Business) which David Emanuel kindly reviewed. Jos Moule provided comments on chapter 13 (Family Partnerships).
Natalie Payne produced an early draft of chapter 14 (Family Business Trusts) and Edward Cumming of XXIV, Old Buildings Lincoln’s Inn provided many detailed comments and insights, which have been incorporated into the final draft.
So far as chapter 16 (Tax and Family Ownership) is concerned, once again thanks are due to David Pierce, who wrote this chapter and to his former partners Ruth Dooley and Peter Griffiths of Hazlewoods, together with Emma Bradley tax partner of Veale Wasbrough Vizards, who each reviewed parts of this chapter.
Part D – Family Matters
I am grateful to Irene Pedder, Chair of the Clark’s Shareholder Council for reviewing and commenting on the case study on the Clark’s governance system contained in chapter 17.
The chapter on the family business and marriage (chapter 18) was a truly collaborative effort with original content provided by Oliver Early, with Samantha Hickman of Veale Wasbrough Vizards and Andrew Commins of St John’s Chambers in Bristol both contributing many helpful thoughts and suggestions which have been included in the final draft.
Julia Hardy can be thanked for her contribution in preparing the first draft and reviewing final drafts of chapter 19 (Inheritance Disputes) and for her enthusiasm and commitment to this project generally.
Part E - Family Business Disputes
Huge thanks are due to Andrew Marsden of Commercial Chambers Bristol for his sterling contribution in reviewing all five chapters dealing with the legal aspects of disputes in family companies contained in this part.
Part F – The Family Business Advisor
John Tucker of the Family Business Consultancy shared his wisdom and experience, which added significantly to the chapter on process consulting and the role of the family business consultant (chapter 25). Similarly chapter 26 (Advising the Family Business Client) was tempered and hardened by robust discussions with Claire Ainley the Veale Wasbrough Vizards compliance partner.
Kate Hather, Mary Kenny and their colleagues at Jordan Publishing, now part of LexisNexis, together with my editor Tracy Robinson provided huge support and valuable guidance, without which as a first time author, I would have struggled to take the concept of this book through to the finished article. The practical assistance of Katie Hanson in keeping track of innumerable drafts of the various chapters has been invaluable.
But the final vote of thanks must go to my friend and colleague John Tucker, who not only introduced me to the particular challenges of advising family owned businesses over 15 years ago, but who has been a constant guide and companion on that fascinating and rewarding journey ever since.
Family businesses see themselves in terms of their legacy. They take a much longer-term approach to investment often making sustainable investment that leaves them better able to weather inevitable storms.
And this ethos and good practice is passed down from family member to family member, but also to the staff who are employed in the business. Working for a family business means working for a family, and staff turnover is often much lower than in other businesses.
But these strengths can also be weaknesses. A refusal to change or a lack of outside objectivity can stop a family business from achieving its true potential. A good family businesses knows that there are times to look for outside help.
That is why I am very pleased this book is available to help family business and their advisors deal with the particular issues they face. Succession, ownership, and disputes are taken to a whole new level when family is involved!
I am an enthusiastic supporter of the family business model. It is a business model as old as business itself. It is strong today, and I have no doubt that it will continue to thrive in the future as long as family businesses continue to evolve and adapt to the changing world. This book will help them do just that.
John Stevenson is MP for Carlisle, Chair of The All-Party Parliamentary Group for Family Business, and is a practicing solicitor and partner at Bendles LLP solicitors
Emma Bradley, Tax Partner, Veale Wasbrough Vizards
Andrew Commins, St John’s Chambers
Edward Cumming, XXIV, Old Buildings Lincoln’s Inn
Ruth Dooley, Hazlewoods Accountants
David Emanuel, Veale Wasbrough Vizards
Paul Esmiley, Foot Anstey
Peter Griffiths, Hazlewoods Accountants
Michael Halsey, Veale Wasbrough Vizards
Katie Hanson, Veale Wasbrough Vizards
Julia Hardy, Veale Wasbrough Vizards
Samantha Hickman, Veale Wasbrough Vizards
Richard Hiscoke, Veale Wasbrough Vizards
Professor Andrew Keay, Leeds University
Andrew Marsden, Commercial Chambers Bristol
Steve McGuigan, Veale Wasbrough Vizards
Victoria McMeel, Bevan Brittan LLP
Jos Moule, Veale Wasbrough Vizards
Natalie Payne, Mackrell Turner Garrett
Irene Pedder, Chair, Clark’s Shareholder Council
David Pierce, D R Pierce Consultancy Limited
Emma Rudge, Michelmores LLP
Jessica Scott-Dye, Veale Wasbrough Vizards
John Tucker, Family Business Consultancy
Sarah Want, Veale Wasbrough Vizards
Paula Williams, Veale Wasbrough Vizards
IntroductionWhy this book?
The family business is the oldest and most common form of economic organisation on the planet. A selection of the evidence supporting this claim is contained in chapter 1 (Introducing the Family Owned Business).
Even so neither the management and behavioral professions nor the academic world had, until recently, paid much attention to family businesses as a distinct category. This has changed significantly over the last thirty years or so. During this period a whole raft of writing, theorising and thinking has taken place about family business issues. Various organisations have been formed to help family owned businesses and their advisors access this body of new knowledge. Most significantly a new breed of professional, family business consultants, has evolved and have developed new approaches and methods based on this thinking to help business-owning families with the particular challenges they face.
But awareness of this new family business movement amongst the traditional financial professions, including law, accountancy, banking and financial advisors, is, at best, fairly patchy.
Although the traditional professions have been dealing with family businesses, in some cases for millennia, they have been slow to recognise family owned businesses as a separate category from other non-family businesses. To illustrate the point feel free to try this simple test. Pick a professional textbook at random, turn to the index and look for ‘family business’ or similar terms. Of the sample we have tried we have yet to make a hit.
Of course it is possible to reverse engineer the process. With experience and knowledge of where family business issues are likely to be encountered, the technical professional will be able to unearth relevant content: for example a tax accountant may open the index of a tax manual to look under close companies for relevant legislation and commentary to advise a smaller family company. So the technical issues relevant to the business owning family can be found within the vast sea of knowledge available to the financial advisor. But this is likely to be in general terms rather than specific to particular family business situations. It is even less likely that works covering general technical advisory issues will take any account of the thinking generated by the family business movement.
A further challenge faced by technical advisory professionals is increased specialisation, not only between but also, within professions. But one of the key messages in family business thinking is that the advice needed to support a family business client undertaking a complex process, such as succession, cannot be neatly confined to a single profession such as organisational development, accountancy, or family business consultancy. Such advice most certainly cannot be provided from within individual silos of specialisation, for example the private client or corporate restructuring teams of a law firm.
Working on the basis that family business advisors, individual professions and specialist teams within those separate professions inhabit separate worlds, the hope is that this book can help to provide a bridge, or rather a number of bridges, between those worlds. So that, for example, a lawyer dealing with the early stages of conflict in a family owned company, will find some useful background on family dynamics which has been developed within the family business world, as well as some application of that thinking to the technical legal issues that they are dealing with.
Who is the book for?
In short the book has been written for family business champions. By which we mean anyone with an interest in and involvement with family owned businesses. Certainly family business champions can be found within the ranks of every family business client. They should also be present in any professional organisation with family business clients. That is not a moral judgment or a plea for fellow professionals to share an interest in the complex form of entity that is the family business. It is simply common sense. On the basis that family owned businesses make up a significant proportion of the client base of most professional firms, as will usually be the case, it must be in the commercial interests of those firms to take sensible steps to understand the dynamics and issues facing those family business clients and to consider how the service offering of the professional can be modified to best meet those client needs.
Inevitably a book commissioned by legal publishers, and written by a legally trained lead author, supported by various other lawyers as contributors or collaborators, has been written primarily with a legal audience in mind. But the aim has been to produce something that will also have direct relevance to family business members facing particular issues and challenges within their own family business, such as the introduction of family charters or other family business governance mechanisms and to members of other professions, for example accountants or family business consultants whose own family business clients might be facing a divorce or a family shareholder dispute and who wish to gain an overview of the legal background so as to be able to support their client through that process.
On the basis that readers may potentially come from different worlds, separate glossaries have been included. For ease of reference a list of concepts and terms forming the language of the family business world. Also, for non-lawyers, a glossary of basic legal expressions and terminology used in the book has been added.
The approach taken
The law applicable to family owned businesses is the law. There is clearly a huge amount of law out there. Although much of it has arisen in the context of the family owned business this is almost never categorised or indexed as such. But it is not our intention to restate topics that are well covered elsewhere. Neither is it our intention to comprehensively cover all topics that affect family businesses.
Instead we have attempted to select topics of particular relevance to the family owned business situation and to provide a broad overview of those topics. That overview is intended to help orientate the non-specialist, be they a family business owner, a non-legal professional or a lawyer needing a broad understanding of an area of law that they do not routinely work in. In many cases we have signposted further and general works or reading on the subject matter concerned.
Alongside that overview we have attempted to apply some of the family business theory referred to above to particular legal situations. The hope is that this will be relevant to specialist and non-specialist alike.
Finally, in a number of areas we have delved deeper into technical legal issues, for example in relation to shareholder remedies, to consider a number of legal issues in the context of family business situations. The aim here is to provide a specialist practitioner with an alternative and family business centric perspective of some particular technical legal issues.
Compared with a standard legal text this book cites fewer cases but looks at these in much more detail than would usually be the case. This is for various reasons. First, for the ease of reference of non-lawyer readers who might not have ready access to law reports. Secondly much family business writing and teaching is based on case studies of real life family business situations. By applying an extended treatment to a selected number of legal cases we aim to use these to illustrate various issues of family business dynamics as well as to explain legal principles. It follows that some of the cases have been chosen on the basis that they illustrate issues of family business dynamics and whilst they are relevant to legal issues are by no means leading or landmark cases on the subject concerned. As such the cases cited in the book should be read for their value as much or more as family business stories or case studies rather than as legal precedents.
Of course the information to be obtained from case reports is limited to the facts reported in the transcript or judgment concerned. Examples based on personal practice and information in the public domain relating to well-known family businesses have also been used to supplement the reported legal cases largely relied on for practical real life examples.
The purpose of this book is neither to praise nor to bury the family business as an ownership model. Rather it is to explain it.
Inevitably much of this book (and of course the legal disputes used as case studies) highlights the negative aspects of family business life. It is important to maintain a sense of balance and perspective. The danger is that good aspects of the family business model become obscured by the bad and the downright ugly. Equally there is a danger of over-compensating and swinging too far in the direction of romanticising family firms as paragons of business virtue. Succession, longevity and continued family ownership become prized as goals in their own right, even when the interests of individual family members might be best served by separation from the family business or that of the wider business owning family by an outright sale.
One of the key objectives of the process consulting methodology used by family business consultants and explained in chapter 25, is that the role of the family business advisor is to help their client identify the best course of action for them. This must be done in a way that is free from the pre-conceptions and bias of their advisors.
The working assumption of anyone picking up a book about family business is that it will be about succession. This book is no exception. The topic of succession is one of two key threads running throughout this book. Whilst the subject of succession forms the express subject matter of only two relatively short chapters, its presence can be felt on almost every page. Every mention of the next generation carries with it the implicit assumption of succession plans.
Although succession is often seen and treated as a generic issue we have separated the specific treatment of the topic into two separate parts, management and ownership succession (dealt with in chapters 7 and 15 respectively). Partly this is to help illustrate that succession is a multi-faceted topic. Partly this is because the issue of management succession fits most logically into Part B dealing with business issues and that of ownership succession into Part C – Ownership
The second core thread running through this book is governance. In many ways the whole book can be read as an advertisement of the benefits to business owning families of investing in governance process. No apology is made for this.
Whereas the question of succession can be seen as a background presence the treatment of governance (broadly interpreted) is much more explicit. There is a lengthy chapter (chapter 17) dealing with specific family business governance mechanisms.
The very fact that the families featured in the law reports used as case studies points to a catastrophic breakdown of family relationships. The question becomes could that have been avoided, at any stage, by the intervention of some form of governance? Potential interventions, labelled as a governance application points or GAP are flagged at various points in the book.
It will be seen that in most of those cases the governance application point identified does not involve formal documents or procedures such as family councils or family charters. The ‘application’ suggested might be much more simple and straightforward, such as detailed thought and discussion on the basic wisdom of families deciding to go into business together, or to admit a family member to ownership. This reflects a very broad working definition (attributed to a leading family business academic John Davies) that family business governance involves ‘getting the right people in the right place to discuss the right things at the right time’. It will be seen that this definition goes way beyond formal meetings and paper.
Obviously these governance application points are raised with the benefit of hindsight and based solely on the reports or transcripts of the relevant case. So the points are framed as tentative questions, such as ‘was this tried?’ or ‘would this have made a difference?’ rather than absolute and definitive statements of recommended best practice.
This is not a tax book. Often the subject of family business succession is discussed in the context of tax. So much so that tax and succession are sometimes seen as two sides of the same coin. Although there are short chapters dealing with the basics of family business tax issues, tax is not covered in any detail. Clearly the taxation implications of any ownership or disposal decision are a significant factor for the family business member concerned. But one of the arguments made in this book is that more significant difficulties can be caused for the business owning family if tax treatment is allowed to dominate the succession and ownership debate. Partly for this reason, and also because tax issues and estate planning are well catered for in many technical publications, the subject receives a comparatively light touch treatment here.
The scheme of the book
One of the points that will quickly emerge is the complexity of the family business situation and with that, how family business issues are often intertwined. For example succession can raise issues relating to employment, personal and corporate tax, company structures, property and pensions. That is to say nothing of the organisational, family dynamic and operational issues raised.
It therefore follows that any attempt to place family business issues into rigid categories is doomed to failure. But some structure is necessary. The scheme chosen has been to divide the book into separate parts. These are briefly outlined below. But, as will be apparent from the degree of cross-referencing within the body of the book itself that categorisation is, in many cases, inevitably arbitrary. For example a case could be made to fit chapter 10 dealing with family business property into the sections dealing with ownership or family matters just as much as the section on business issues actually chosen.
The book is structured in parts as follows:
Part A – The Family Owned Business and its Dynamics
These three chapters are intended to provide an introduction to family business concepts. They are almost entirely free from legal or other technical content.
Chapter 1, introducing the family owned business, is intended to orientate the reader by positioning the importance of the family owned business within both the UK and the world economy. It also looks in some detail at the definition of a family business and introduces the main case studies or family business stories discussed at various stages in the book.
The next chapter, Themes, introduces some of the key issues identified with family business life, such as sibling rivalry and the character and psychology of the founding entrepreneur.
As the first two chapters raise questions about the complexity of family businesses, chapter 3 is intended to introduce some key tools, models and theories to help advisors and business families understand and deal with that complexity.
These include the foundation stone of family business thinking, the three-circle model. As with the best of business models, the three-circle model is sufficiently simple so as to appear blindingly obvious once encountered and also useful enough to be used time and again.
Once introduced these tools and models, and especially the three-circle model, are referred to extensively throughout the rest of the book in an attempt to provide the bridge between technical content issues and family business thinking.
Part B – Business Matters
There then follows a series of chapters covering topics primarily positioned within the business system of the three-circle model. But it will readily be seen that in all of these cases there is an inescapable link between the topics discussed and the other two systems.
Taking employment issues as an example, the overlap between business and family issues will be entirely obvious in the case of family employees, discussed in chapter 5. Perhaps less obvious will be the influence of the family system on the position of non-family employees covered in the following chapter. For example where do the employment practices of an individual family business sit on a spectrum with equal opportunities at one end, actionable discrimination at the other and nepotism sitting somewhere between those points?
Chapter 7 – Management succession, deals with the logical endgame of family business employment issues. Will it be the family member or non-family management that take over the leadership of a family firm?
Part C – Ownership
The book then moves into the circle of the ownership system.
Chapter 11 - Ownership Overview, looks at some of the technical advisory issues relating to family business ownership including the application of share buy-back arrangements to ‘prune the family tree’ where the business owning family decide that some narrowing of ownership is appropriate.
The narrow or wider ownership question is especially acute where the family business comprises the lion’s share of the family wealth. Family farming businesses are a prime example. Chapter 13 examines the technical legal difficulties of translating ownership approach into workable partnership arrangements.
Chapter 12 - Selling the family business looks at some of the particular features that apply when the target in a corporate transaction is a family company.
Part D – Family Matters
The chapters in this section, deal with family business governance, matrimonial issues and inheritance disputes in relation to a family business. They can be seen to both illustrate the power of the three-circle model and the virtual impossibility of categorising family business issues into neat boxes. Those last two chapters show how irretrievably interconnected family, business and ownership issues are within a family firm. The governance chapter explains how the family business movement has generated mechanisms to balance and deal with that complexity.
Part E - Family Business Disputes
This group of chapters provides a fairly detailed overview of the remedies available to shareholders in family companies, including the primary remedy of an unfair prejudice petition. In practice these chapters provide the best advertisement for family business governance. If the situations of the families featured in those chapters do not convince business families and their advisors of the benefits of governance as a preventative process nothing will.
As will appear from the detail of the chapters the remedies are based in either equity or discretion conferred on judges by statute and, as such, are largely within the discretion of individual judges. The remedies can therefore be of uncertain application.
Partly this might be seen as a clash in the courts between the business and family systems. There is a long tradition of the law seeking to provide certainty in business dealings, dating back to Lord Mansfield, credited as being the effective founder of modern commercial law and his view that ‘Nothing is more mischievous than uncertainty in mercantile law’. It will inevitably be difficult to reconcile this desire for certainty with the ambiguities and contradictions of family life. The theme of the struggle of the courts to do so with family businesses is explored in detail, in particular in chapter 20 (Family shareholder disputes – an overview). The remaining chapters in this part introduce the individual remedies available to shareholders in family companies and explore how the courts have applied these to particular family business situations.
Part F – The family Business Advisor
The final part of the book concentrates on the process and practicalities of advising family businesses. Chapter 25 – Introduces the concept of process consulting, a different approach to advising business families, based on the practice of therapy and organisational development professions and examines the differences between this approach and that typically taken by the technical and expert or ‘content’ professionals in the legal, accountancy and similar fields.
The chapter also explains the role of the specialist family business consultant, as a relatively new citizen of the family business world as well as providing a very brief overview of what we have termed the family business movement.
Chapter 26 - Advising the family business client, attempts to apply the lessons learned from the rest of the book to the day to day practice of the legal and other financial advisory professional and asks the question is the advice that is being delivered ‘fit for family business purpose’?
Linked to these chapters is a separate appendix with a brief overview and contact details of the main organisations comprising the family business movement and of most relevance to family businesses and their advisors in the UK.
Contributors and collaborators
Finally, before turning to the detailed content, a short explanation of how this book has been put together. Although the vast majority of the book has been written by the main author, Nicholas Smith, the book has immeasurably benefited from review and comments by other colleagues and collaborators mentioned in the preface.
More generally the views and thoughts expressed in this book have been formed and shaped as a result of a huge volume of conversations, reading, discussions, learning, teaching and above all working with family business clients over many years.
On this basis, whilst taking responsibility for the views expressed (subject, of course to the usual legal disclaimer) it would be entirely inappropriate for the lead author to claim sole ownership of these views and ideas. Accordingly the second person pronoun ‘we’ has been used throughout the book.
1 Metcalfe v Hall  Mss. Rep. Vol. 18. Fol 16 MS. Room S. 1 BR Durnf 168, 408 (VC), discussed in Lord Mansfield – Justice in the Age of Reason by Norman S Poser McGill-Queens (University Press, 2013).
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