Getting it right - avoiding the pitfalls
Keep within the law – it can be very expensive in every way to get it wrong with employment law, health and safety law, tax planning, and company law compliance, as well as keeping within the new anti-bribery legislation.
Are you planning to start a family business? It is easier to “Get It Right” if you start with a blank sheet of paper as you can set the ground rules and have everyone go in with their eyes open. One of the troubles with blank sheets of paper is that there are no warning signs about pitfalls!
Time spent thinking about, and discussing, the aims and desires of the people who are setting up a new business or who are running an existing business, is probably one of the most valuable investments that can be made in any business, and especially in a family business.
The things to think about include:-
1. Structure – Limited Company, Partnership Limited Liability Partnership? Don’t be tempted into the wrong decision purely to save some tax. What is the right structure – limited liability with the protections it gives, or unlimited liability with the flexibility and relative anonymity surrounding ordinary partnerships? Consider the “what if?” scenarios. If the present structure is not appropriate, don’t be afraid to change it!
2. How much capital to put in (certainly no more than you are willing to lose!).
3. Who owns the shares, and who has any majority? Is today’s situation still going to work in five or ten years’ time? What about deadlock?
4. Who does which jobs, and who has what responsibilities?
5. Whether, and to what extent, to involve non-family members is a question of trust. Don’t be fooled into thinking that only those who are involved in the family business understand the business.
6. If anyone wants to sell their shares, is there to be a right of pre-emption (first refusal) in favour of the family, or the existing shareholders, and is there provision for independent valuation with parameters for determining the value?
7. Are there set policies for example – employing family members, dividends, expansion, diversification?
8. How do you protect the family against the possible collapse of the business – put the house in the spouse’s name, subject to a lifetime right of occupancy, put other assets in the spouse’s name? Note that this reduces your own assets and can lead to difficulty with financing. Limit the amount of, or avoid altogether, personal guarantees. Consider having the shares held by a family trust.
9. Consider who are to be the advisers of the business. Accountants, solicitors or others including marketing advisers? Cheap advisers are not always the best advisers.
10. Review regularly your processes, suppliers, IT, and staffing needs.
11. Review your bank – are they being helpful, and are you getting value?
12. Do not throw personal money into a doomed company. Is any cash injection just needed for a short term blip, cashflow etc, or is it is propping up a failing business, and just papering over the cracks?
13. Avoid spending all your time doing and spending no time thinking. Take time out, preferably away from the business premises, to look at the business as objectively as possible. Consider new areas of involvement, cost savings, cut out loss making parts.
14. Assess the risk of customers becoming insolvent – consider obtaining insurance cover to protect against this. Have good credit control procedures in place, and use them.
15. Avoid emotion when it comes to money, if at all possible.
16. Invest in a good stocktaking system.
17. Invest in a good management accounting system.
18. Draw up an informal one year, three year and five year plan of where you see the business.
19. Consider, and if appropriate, take out key man insurance.
20. Keep within the law – it can be very expensive in every way to get it wrong with employment law, health and safety law, tax planning, and company law compliance, as well as keeping within the new anti-bribery legislation.
21. Nothing is forever – just because “we have always done it this way” it does not follow that it is still the correct or best way. Don’t be afraid of change after having obtained good and objective advice from professionals.
For further information please visit our families in business page.
This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue.
