By Julie Bailey, Andrew & Co LLP
Family businesses are often described as the lifeblood of the economy and indeed there are around three million family businesses in the UK with a combined turnover of £1.1 trillion (in 2010).
While many are hugely successful, running a business with a relative is not always plain sailing. As we have seen from high-profile cases, such as Gordon Ramsay’s recent court battle involving estranged father-in-law Christopher Hutcheson, relationships can quickly sour, especially when money and livelihoods are at stake.
We meet a lot of couples who have set up in business together and are separating or getting divorced. This can be a traumatic enough experience but when a business is involved it can be even more stressful.
Resolving matters can be more complicated where there is not only a financial dependence on the business but also if it is run from home and the parties live in or on the business premises.
Of course, some businesses also involve children, siblings or in-laws and a parent and their son or daughter or a brother and sister could also find themselves in a similar position. When personal relationships become bitter, working together can become impossible. Regardless of the family connection, if you co-own a family business, you shouldn't totally rule out the possibility that you won't ever be faced with these sorts of problems. However, there are common mistakes people make which can be avoided.
For instance, it is tempting to treat family members differently to other employees. Be careful not to show them special treatment, however, as it can de-motivate other staff and set a bad example. Also, you don't want non-family members to feel like a raise or promotion is out of their reach as this can breed contempt.
When making commercial decisions emotions can get in the way and influence our judgement or behaviour and disagreement often arises out of lack of clarity. Things need to be clear from the start in terms of who is making what decisions, what people’s roles and responsibilities are and what they can expect to receive by way of payment.
Proper advice and planning is vital. On the family law side that includes the likes of pre or post nuptial agreements for married couples or cohabitation agreements where couples live together but are not married. Such agreements can spell out what each party's expectation is if things do go wrong and provide for practical but nevertheless important details that a court cannot rule upon for legal or financial reasons. The expectations will also be discussed and agreed when everyone is thinking rationally and acting fairly.
On the commercial side, partnership agreements, shareholder agreements and employment contracts drawn up by a business law specialist need to be put in place. Again they will set out formally what everyone's rights and responsibilities are. The consequences of not having the right legal infrastructure in place can be severe. You could have a partner or shareholder who could hold the business to ransom or, in the case of a minority shareholder, cause serious mischief. If you’re reading this and feeling a rising sense of panic as you didn’t get these documents drawn up during the formation of your business, don’t worry - it's never too late!
Although many people don’t like to think about their own mortality, succession and will planning are also essential, especially if your business is going to be included in your estate. When you ask about succession, you'd be surprised at how many business owners haven't given it serious consideration. They're often so caught up in running their business and making it a success that they haven't given any thought to what would happen if they were to die or think they don't have to focus on it yet. Some struggle with the very idea of letting go of the reins.
Admittedly there is an awful lot to consider, which is why we would urge people to seek independent legal advice before mixing business with pleasure.