The secrets to running a successful family business

The family business is a staple of British industry. They employ 9.5 million people - that's one job out of every three in the whole of the UK - and account for more than 30% of the national economy.

But it's estimated only one in 10 of these companies will make it past the third generation. According to the Institute for Family Business (IFB), flawed succession planning results in 100,000 shutting down (or being severely affected) each year.

So what is it about handing a business down from one generation to the next that is so troublesome?

Family affairs

The answer boils down to family politics and poor planning. Every family has its issues, be they father/son conflicts or sibling rivalry. But within a family business, these emotional dynamics are combined with business objectives, adding a unique layer of complexity to the pursuit of enterprise.

IFB director general, Grant Gordon, says: "Typically, founding entrepreneurs are reluctant to give up their position and control to the next generation as they approach retirement."

John Tucker, from the International Centre for Families in Business, has encountered numerous examples of this during his 15 years as an adviser to family businesses.

"When 65 to 80-year-old men, who built their companies up from scratch and have never done anything else, come to pass the business down to their heirs - still usually their eldest son - they deal with some very difficult emotions," he says.

"On an intellectual level, they want their son to be successful and take the business forward, but on an emotional level, they often admit to not wanting their heir to be any more successful than they have been."

There are plenty of other difficulties the incumbent generation has to address when planning for succession. How do you choose a successor from among your children? Do you relinquish your shares and if so, who do you give them to - just those family members working in the company?

Of course, the answers vary from one family to another, but what remains common ground among them all is that if these issues aren't addressed and planned for well in advance, the result is usually calamitous for the business - and that is precisely why nearly 90% of family firms cease trading by the third generation.

Tucker is currently working with one family business that could soon find itself failing to make it to the second generation of ownership, never mind the third. "Part of my client portfolio includes two 65-year-old brothers who built a business together but have never planned for their succession.

"They both brought their children into the business and now they are approaching retirement a bitter turf war has broken out. Each is championing their own heir as successor and it's causing a lot of pain for everyone involved. It's a very sad situation."


How to make the best of an unplanned succession

Leigh Chadwick, 53, managing director of family-run Seasalt Cornwall, also has personal experience of dealing with a lack of succession planning.

Leigh and his brothers Neil and David run the clothing business originally set up by their father Don in Penzance, Cornwall, in 1981. Starting out by selling army surplus clothes, today the business comprises an award-winning chain of organic clothing shops.

When Don, who was still very much involved in the business, died in 2001, his sons found themselves in a very difficult situation. No succession plan had been put in place and while they each held shares, David and Neil were working for the business but Leigh, a chartered accountant, was working elsewhere.

Recognising the need to communicate with one another and to put the needs of the business first, the brothers avoided many of the potential pitfalls that can result from a lack of succession planning.

"We decided to co-lead the business to take advantage of our different skills," explains Leigh.

Today, after completing an MBA in family business, Leigh is managing director, while Neil is creative director and David is in charge of retail and HR. The brothers have set up a family constitution to clarify the shared vision for the business and establish what its goals and priorities should be.

"The constitution helps us to plan for hypothetical issues such as whether our children should have automatic rights to join the business even if there might not be a vacancy," Leigh says. It also covers remuneration and whether every family member should be earning the same salary or whether there should be recognition of different roles and responsibilities.

Juliette Johnson, head of family business at private bank Coutts, has helped write many family constitutions. "Families who communicate openly and who plan for future challenges are definitely more solid and prepared than those who don't," she says.

Family businesses are complicated affairs, but having a shared vision, good communications and plans for the future firmly in place will help your business survive the generations.

Top five tips for keeping it in the family

1: Establish a shared vision for the business and outline objectives and priorities.
2: Make sure you maintain open communication. Don't leave issues to fester.
3: Clearly define roles and responsibilities among family members.
4: Manage expectations: not everyone can be the boss and family members shouldn't expect to be entitled to the business.
5: Plan for the future early to ensure a smooth transition between different phases of the business's life cycle.