Family businesses have long been part of New Zealand's commercial landscape. It's estimated that family businesses represent 75% of all businesses in New Zealand. However, despite their prevalence, many family businesses don't survive beyond the second or third generation. This article gives some guidance to those who are either already involved in a family business, or are contemplating setting up a family firm.

The high failure rate of family businesses can often be attributed to family conflicts and a lack of formal planning. Often familiarity is to blame for family businesses failing to carry out essential tasks, such as creating clear role descriptions, planning for the ongoing success of the business through the various generations, and documenting dispute resolution procedures and rules addressing governance and decision-making.

 
Independent directors/managers

As family members are very familiar with each other, it's easy to lose a degree of objectivity and impartiality. Accordingly, family businesses can greatly benefit from engaging an independent (and appropriately qualified) personas a director or manager. This person can provide impartial advice and guidance. They can help define roles and responsibilities, and carry out the performance and remuneration reviews of family members and other employees to help avoid contention in these areas.

 

Conflict resolution

Most families experience conflict, but the challenges arising from conflict can be multiplied when the family members are also in business together. We recommend that all family businesses should have a well documented dispute resolution strategy to ensure family disputes are resolved quickly. The strategy will usually include mediation. Engaging an independent mediator will help family members focus on the issue at hand, and prevent personal family issues clouding their ability to remain objective for the sake of the business.

 

Succession planning

Family members need to start thinking about the future of the business and plan ahead. Potential successors need to be identified early. Possible successors could be the current owner's children or existing employees. Alternatively, the family business may need to consider appointing a professional manager or selling to a third party. It's particularly important for parents and children to clearly communicate their expectations and intentions in regard to the future of the business. Parents often presume at least one of their children will take over the business only to find those children have other ideas.

 

Shareholder/partnership agreement

Business owners often presume that because they have a family business, they don't need to address and record essential rules governing their relationship as business partners and the operation of the business. However, a shareholders' or partnership agreement is just as important in a family businesses as in any other commercial enterprise. A good agreement will address key issues which, if not dealt with, will affect the success and survival of the business. Those key issues include:

 

  •    What happens if a business owners' marriage or personal partnership dissolves?
  •     What will happen to the business if a principal member of the business dies or becomes permanently disabled, or wants to retire?

  •  How will disputes be resolved?
  • Whose consent is required for different decisions within the business such as hiring and firing employees, setting employee remuneration, raising capital and entering into significant contracts?

If you have a family firm, start treating it like any other business and put in place the necessary rules, documents and plans to ensure its future growth and success through the generations.