12

SEP
2013

Family business FAQs

Family businesses, like all businesses, are the backbone of a country’s economy. Nevertheless, their uniqueness forces them to meet challenges which go beyond those of other companies’ (results, sales, cost control …). A family business is an environment where people come together who share a business, work and, what’s more, a family relationship, a basis for potential conflict which must be acknowledged, planned for and resolved in time, in order to guarantee the continuity of the business into the next generation.

In this post, we will answer the questions family business members are most constantly asking us. We ask you to read them carefully and if you have any further doubts don’t hesitate to get in touch with us. We will be happy to clarify them.

What is a family business? A familly business has three main characteristics: 1) The ownership of the business is concentrated in a family group; 2) The family takes part in the management and governance of the compan; 3) There is a commitment to continuing in the business on the part of the family.

Do you have to be an SME to be a family business? No, a family business does not have to be an SME, and there are many large companies which are family businesses. To be considered a family business, the control of the company must be in the hands of one or several families.

What are the most common mistakes made by family businesses? There are two problems inherent in family businesses: (i) a lack of professionalisation and (ii) a lack of provision for conflict and succession.

(i) Lack of professionalisation: It is only human and perfectly understandable that when you are sharing a business and work, there is a tendency to transfer family ways of interacting to the company. However, this misunderstood “familiarity” is a dangerous enemy which disturbs objectivity, stops you from using business criteria when dealing with business matters and leads you to defy market criteria when deciding salaries and working conditions, or hiring family members to work in the company. The result of all this is a big drain on the professionalisation of the company which, sooner or later, will take its toll.

If the company wants to keep its family nature it must be capable of professionalising. It cannot afford the luxury of hiring family members haphazardly, or of implementing shoddy decision making processes, because this will make the triangle family-company-ownership about as solid as a house built on sand. Instead, you must put in place a well organised, objective decision making process which responds to business criteria. To this end, the incorporation of non family directors is extremely useful.

(ii) Lack of planning for conflict and succession: The members of a family business must understand that they are in an environment where their roles as relatives, business owners and workers are intermingled and superimposed all day and every day. This is, unfortunately, a breeding ground for disputes and conflict and to deny it will only make matters worse. Problems need to be anticipated and dispute resolution procedures in place for when disputes arise, as arise they will. Not only day to day friction has to be anticipated, but also matters of such importance as the training and incorporation of family members into the company, the governing body, the valuation and transmisission of stakes and shares and so on, and the key question, business succession: how can a succession plan be implemented? When should the succession planning process be started? How can we ensure the succession will be a success?

To forsee and decide on the solutions that each company needs to have for all these extremely important matters, it is essential that you draw up a family charter and put it into effect.

What is a family charter? It is an agreement signed by all the family shareholders which sets out the rules and regulates both the organisation and management of the company as well as the financial and professional relationships between the family, the ownership and the company. The aim being always to maintain the continuity of the business.

The family charter is not a document to be signed and filed away. It is a basis for discussion and debate and is an exploration of the personal relationships among the family business owners. The process serves to identify problems and agree on solutions. The key to its success is that discussion arises from a useful living document, which evolves alongside the members of the company and adapts to their changing needs. Given its vital importance, it is essential that an outside professional leads the process, in order to guarantee that neutrality and the common good take priority over individual preferences.

Are there tax advantages for a family business? Yes, there are tax advantages. Providing certain requirements are met, the ownership of a certain number of company shares or participations are exempt from Spanish personal wealth tax (Impuesto sobre el Patrimonio).

At the same time, and, again, providing certain conditions are met, with the aim of favouring the continuation of the family business, very favourable tax treatment is given to the transmission of ownership of the company to other members of the family, whether by donation or succession there is a reduction in the gross tax base of 95%.

If you are a member of a family business you need to be properly advised on an ongoing basis, as the continuity of your business wealth, and, therefore, of your legacy to future generations, depends on the objectivity and success of your decision making today.

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