One of the biggest challenges for any family business is the matter of ownership. When the person who founded your business started out, it wasn’t an issue. They owned all of it, they built the company up and they benefited from it’s success.
As family firms progress through the generations, it becomes a little more complicated. Shares are divided up, bought, sold, transferred… it can get tricky. So when you and your parents decided that you were the best person to lead the business after them, you might have assumed that ‘leading’ the company also meant ‘owning’ it.
Yet here you are, running the company; your parents fully retired and getting on with the next phase of their lives, and the majority of shares are still in their name. Yes, you are paid a salary (and they may have gifted you some shares), but at the end of every year, the profits that you worked so blooming hard for are carved up as dividends for your parents.
This can cause several difficult issues. Whilst you don’t begrudge your parents a comfortable lifestyle – after all, they worked extremely hard, 24/7, to build the company. It’s hard to feel driven and incentivised when you don’t see any financial return from all of YOUR work. Just as they did, you’re pulling the late nights, missing your kids big events, not seeing your friends or having time for any hobbies. You have a pang of guilt for even thinking like this but you can’t see how you can carry on thinking about the future for the business when you don’t have the security of knowing you’re building something for you and your family.
Does it also make you feel they don’t fully trust you? Perhaps they’re still holding onto their shares until you’ve proved, in their eyes, that you’re as good as them?
Lastly, it’s hard to make strategic decisions about the company when you’re acutely aware that every decision you make will affect your Mum and Dad’s dividends. It’s like having one hand tied behind your back and not having the full freedom to make the choices you would otherwise. Growing a business involves taking risks – investing in new people, technology, diversifying… it’s all the things you need to think about to grow but at the moment your parents are the only ones who will suffer if things don’t pay off. It’s hard to be entrepreneurial about decision making when your hands are tied.
First of all, please know that it’s absolutely ok to be thinking about this. After all, one of the biggest benefits of running a family business is that you’re creating something that will benefit you for the rest of your life. Running your own business is tough but at least you’re in control of your own destiny rather than working for someone else or a large corporate company. So there are a few things you can do to start getting to the bottom of this shareholding dilemma –
Firstly, speak to your parents about ownership. Whilst they’re very used to owning the whole business and it being a simple set-up perhaps they haven’t fully understood what that means to you. Talk to them about your passion and drive to build this business but also about what you’re sacrificing in order to do it. Perhaps all of you can sit down with a financial advisor, play out various scenarios and and make a plan for the future. Don’t forget this is your Mum and Dad’s pension so they will be holding onto their shares for a valid reason and may not be ready for you to own 100% but perhaps you can come to an agreement whereby you’re all equal shareholders or you are 51%.
Secondly you need a mechanism for being able to make decisions and take risks without worrying about a temporary drop in profits which will directly affect your parents. Perhaps have formal, quarterly shareholder meetings where you present your plans for the next quarter and the financial projections. Explain to them that some decisions won’t have an immediate impact and it could take a few years before you see any return. But the main point is that you’re making long-term decisions for long-term success. If you’re all equal shareholders or if you’ve managed to get to the point where you own the majority of the shares, they’ll understand that you’ve got as much to lose as they have and that you don’t make decisions lightly.
Thirdly, help them to understand that if you’re going to dedicate your life to taking over the family business and making it even more successful, you need security for your own family. You need to know that if there’s some financial return and security for everything you’ll be sacrificing. The last thing they’d want to see is for you to struggle, after all you and your family are their own flesh and blood. But perhaps they just haven’t thought about the long-term future.
Having these sorts of difficult conversations is all part and parcel of working in a family business. The end result will hopefully be that everyone benefits but in the mean time, communication is the key to everything.
Let’s recap on the three things you can do to get those conversations started.
ONE - speak to your parents about ownership. You might like to involve a financial advisor and come to an agreement that everyone’s comfortable with.
TWO – find a mechanism for decision-making. Start having formal shareholder’s meetings so you can lay out your plans and then get on with them without having to revert to your Mum and Dad every time.
THREE – help them understand you need security for your own family. They know the sacrifice and commitment that come with running a business so it’s only right that you feel secure about your future.
So whilst you get going with those ideas, I’ll leave you with one final thought – the more successful your family business, the bigger your family’s impact.
Amalia Brightley-Gillott, Managing Director & 2nd Generation
Family Business Place