Family-owned businesses – an asset or a liability?

Speak to a lawyer

Contact Us

More posts on this theme

• Excessive written demands under a personal guarantee

  Jan 9, 2019
  
• No compulsory alternatives to court action

  Jan 4, 2019
  
• Apply for your festive TENs now

  Nov 21, 2018
  

More

An interesting recent study from by Imperial College Business School, Leeds University Business School and Durham University Business School has revealed that family businesses are better at avoiding bankruptcy and insolvency than non-family-owned businesses.

The study looked at what were the particular characteristics of family businesses that led to a better chance of survival. They found they were a larger board size, older and more experienced directors, greater gender diversity, directors who were located close to the business, and directors who had stronger networks of contacts through holding multiple directorships.

Family businesses tend to be owned and controlled by a board of directors that often consists of parents and (adult) children and their spouses. This certainly leads to a larger board than would be usual in a similarly sized company and contains more diversity when it comes to age, experience, gender and outlook.

I agree with the study that this diversity in itself often leads to more stability. The board has a greater knowledge pool and experience that can be drawn upon. Also, family boards tend to take a longer-term view when it comes to decision-making and tend to be more risk averse. This can mean that a company grows slower than would otherwise be the case but less risk-taking does help with avoiding insolvency.

Although the factors mentioned in the study certainly assist family businesses to survive in difficult times, there are also downsides when it comes to the long term. Many family-owned businesses fail to survive as family firms for more than one or two generations. The strengths highlighted in this research can also become weaknesses in the longer term.

One common problem I see when advising family businesses is how they manage the transition of control from one generation to the next. Although family boards do tend to be relatively large, in many family companies, most decisions are made by one or two key directors, usually the founders, and they can often be slow to relinquish control to the next generation. If this is not managed well, then bitter disputes can flourish and, whilst an independent director can always be removed, you can’t dismiss someone from your own family!

Having said this, many families do develop good strategies for resolving internal conflict and, if so, then the family structure can be a great source of strength and resilience.

One finding of the study I found particularly interesting was that, if outsiders join the board, the risk of insolvency tends to rise. These outsiders tend to take more risks but, in my view perhaps more importantly, also lack the experience of the particular family dynamic and how they resolve conflicts. Conflicts are more likely to become acrimonious when an outsider starts ‘taking sides’ and then they become much more difficult to sort out.

Family firms depend on a small gene pool of talent and, as a company grows, new skills are needed that the family directors might not possess. Often, an outsider can bring new insights that the family failed to spot.

There are also times in any firm when more risk needs to be taken and the family long-termism may actually hold things back.

Family businesses have their own particular dynamics and the key is often about how decisions are made and conflicts resolved. If done well, the family structure can be a key asset but, if not managed well, can lead to very bitter disputes.

Gary Cousins
Business Dispute Solicitor

For free advice on this topic please call us on 0845 003 5639.