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Taking over the family firm: What you need to know

For some, taking over the family business is a no-brainer - you've grown up learning the ropes and take pride in what it stands for. But for others, the decision can be tough. Can you continue its success, and what if it's just not right for you?

Family firms are big business in the UK. According to the Institute of Family Business (IFB) there are over 5 million family businesses in the UK, generating almost a third of UK GDP.

They are good news for UK recruitment too, employing 14 million people which equates to 50% of private sector employment.

The pros and cons of taking over the family business

There's a lot to consider before you take over the family business. The first step is to decide whether it's right for you. Here are some of the main pros and cons to get you thinking.

Pros

  • Strong values: Families pass on strong business values that have often built up over multiple generations. There's usually a strong sense of pride in keeping these values alive for the next generation.
  • Built-in experience and support: Your family has spent years developing the business and can pass on their knowledge and understanding. This can provide a helpful sounding board when you need extra support.
  • A head start: Taking on an established firm means that a lot of the groundwork has been done for you. You can balance "business as usual" activities and new opportunities with less risk than when you start a business from scratch.
  • Customer respect and loyalty: Many customers respect businesses that have been in the same family for years. Being well established shows you're dedicated to your customers and that you're skilled and experienced at what you do.
  • Better staff retention: Research by the IFB shows that family and non-family staff have a greater sense of loyalty to family businesses. They also tend to be more committed to the success of the business and more passionate about what the business stands for.

Cons:

  • Family tension: Do you and your family see eye to eye on how to run the business? If you have lots of new ideas, will they resent you taking it in a different direction? It's important to talk these things through at the outset to avoid bust-ups later down the line.
  • Lack of job fulfilment: Are you taking over the business for the right reasons? If you don't feel passionate about the prospect then you could end up feeling frustrated and unfulfilled.
  • Poor succession planning: There tends to be an expectation that family members will take over the reins and continue as usual. In reality, you'll need to draw up a clearly defined succession plan - read on for more advice on how to do this well.
  • The wrong skills and experience: If you haven't been working in the business already, it might take time to build up the right knowledge and skills to run it properly. Is there enough time for this in the succession plan or enough budget to hire someone else in the interim? If not, you might be setting yourself up to fail.
  • Lack of diversity: Family firms, by their very nature, hire family members. But are you also willing to look further afield to bring a diverse range of skills and experience into your team? If so, what impact will this have on relatives who might miss out on promotions?

What is the business worth?

If you're buying the business from your family, it will still need to be valued professionally to make sure everyone's getting a fair deal.

Be sure to conduct your own financial research to spot any challenges and opportunities too. For example:

  • Ask for the full company accounts from the past four to five years and talk these through with an independent accountant.
  • You can also obtain abbreviated accounts from Companies House. It's worth looking at similar businesses within your industry to see how your family's business compares.
  • How profitable is the business? @Talay on UKBF offers this advice: 'My guidebook rule of thumb is to ask whether I could buy it, put in a manager or two managers on £50k each a year and still get some return. If not, then it's a job, not a business.'
  • Consider where you want to take the business in the next five years. What costs could you expect to incur and will the firm still be profitable? Draw up financial projections now.
  • Are there any grants, subsidies or funds that might be available to help grow the business?
Once you're clear about the finances, don't be afraid to negotiate if you think the asking price is too high - or walk away if the numbers don't add up.

'Try and get negotiations on an even playing field and at rates that make the business sustainable for you,' says @Socio South West.

'You may need to spend hours on spreadsheets to get it right, but if it doesn't stack up for you, don't be afraid to decline, regardless of who is on the other side.'

How to make a succession plan that works

A succession plan recognises that taking over a family business is a slow, incremental process. It sets out a long-term vision for the business and looks at how future generations will fit into it.

It should also consider what business preparation is needed for the succession. For example, will interim successors need to be appointed? How will successors get the right mix of experience?

Other non-family management issues that may impact the process include changes to shareholding structures, board membership and management and decision-making processes.

Business acquisition advice

This is a complex area and there's lots to cover. Many families fail to do a thorough job of succession planning, simply because it can feel uncomfortable to discuss these matters with the people you're closest to.

In these cases, getting advice from a business acquisition expert can be invaluable. This neutral, third party input can help families overcome any awkwardness and put a concrete plan in place.

Do you need to get legal advice?

You'll need legal advice when it comes to matters of ownership. Again, this can be complex and will vary greatly depending on your situation, such as:

  • Your family may want to transfer assets even if you're not yet ready to take over - they might be concerned about possible inheritance tax, for example.
  • If you're not ready to take over the decision making. Your family could consider issuing you non-voting shares or placing assets in a trust.
  • If you're splitting the business between a number of siblings or relatives. Most commonly, each person receives equal shares in the company and a shareholders' agreement is drawn up to outline how the business will be run.
  • Another option is to split the business into separate companies to avoid any complications of relatives managing a business together.
  • If part of the business or its assets are being sold elsewhere or being kept by the original owner.

Do you run a family business?

What advice would you give others about taking over or running a family firm? We'd love to hear from you. Share your experiences in the comments below or join the discussion over on the forum.

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ChrisGoodfellow
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