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Take a thoughtful approach to family business ownership

BY   |  TUESDAY, 30 JAN 2024    3:51PM

Family business ownership is more complicated than it seems. The way that ownership is structured has implications for taxation and asset protection. In addition, family business owners must reassess governance issues as each new generation comes of age because decision-making becomes more complex as the family ownership group expands.

Ownership structure 

Key questions to consider include those around tax, assets and succession.

Tax is a significant material cost for family businesses. Therefore, what are the most tax-efficient ownership models, given the regulatory environment in which the family business operates? Does the current ownership structure allow owners to extract profits and capital from the business without an overly burdensome tax outcome or potentially other adverse impacts?

Regarding asset protection, what are the structures that best protect the value of the business and its assets in the event of litigation, family unit breakdown or other adverse occurrences?

With respect to succession planning, which all businesses must deal with at some stage, what governance structure or processes will best support the transition of ownership to the next generation, either within the current owner's lifetime or upon their death?

In any family business, it is imperative to review how the family business is owned from time to time. A compelling event to encourage this is when the business is transitioning generations. An ownership structure that is fit for purpose today may not be ideal for the next generation of ownership. Further, a poorly designed ownership structure can even be a catalyst for ending the family business.

When key stakeholders consider future ownership, they should address the following questions:

  • How can the family best preserve its legacy and potentially expand it?
  • Does this form of ownership set the family business up well for the long term?
  • Is the contemplated structure sustainable? Is it adaptable?

Ownership function

In an owner/operator model of family business, the question of who behaves like an owner is typically straightforward. For founder-led family businesses, ownership decisions are usually made "around the dinner table," and the business strategy is clear. The family business ownership is highly centralized and intrinsically tied to the founder's goals, ambitions, values and vision. The key challenge with these family businesses is arriving at an equitable solution for the successor owner of the business.

Second-generation family businesses traditionally continue the founder's goals and vision. However, this is evolving, and family businesses are recommended to apply a more structured approach to ownership, given that there is often more than one owner at this stage.

Ownership in a thriving multigenerational family business becomes a more challenging question. It is harder to achieve alignment in the family ownership group once it reaches the third and subsequent generations. This is due to the higher number of family members involved, often with divergent goals and ambitions and differing values, together with variances of vision. The need to establish a family governance framework around ownership and decision-making becomes critically important to manage what is often called a "cousins consortium."

Given the broader ownership structure in later-generation family businesses, considerations include:

  • Who gets to behave like an owner, and who is just a stakeholder? 
  • Who has the authority to make decisions that influence the direction of the business and govern the company's long-term viability and prosperity? 
  • What governance structure should be established to ensure all owners are aligned with the purpose of ownership and the ethos of the family?

Ideally, any governance framework underpinning family business ownership will:

  • Emphasize transparent and open communication to strengthen trust and understanding among family members.
  • Ensure that owners are aligned on the business's vision, purpose and strategic objectives. 
  • Provide clarity on how decisions will be made within and between the different family branches.
  • Create mechanisms for conflict resolution, recognizing that conflict is an inevitable aspect of any family business. 
  • Proactively address conflict, including sound dispute resolution procedures.
  • Develop exit mechanisms that are clearly understood by all owners.

Often, these important ownership considerations are addressed through a family charter, establishment of a family advisory board to represent different branches of the family - and a policy that gives guidelines for those family members who work in the business, including how they are offered positions and their remuneration.

Succession of ownership can be challenging, so planning early is important. In multigenerational family businesses, family members can be geographically dispersed and may have had culturally different upbringings. Early preparation is paramount, and mentorship and development opportunities for the next generation are key to future success.