Steve Scarlett: Family businesses need checks and balances to avoid infighting

Steven Scarlett, partner Lovewell Blake

Steven Scarlett, partner Lovewell Blake - Credit: Archant

The recent high court battle between Gordon Ramsay and his father-in-law is an example of what can go wrong with family businesses.

Like any business, a family business needs appropriate governance and communication systems in place to reduce the likelihood of dispute.

The nature of the governance structure needs to be relevant to the size and complexity of the business, as well as the values and objectives of the family owners. Bearing in mind the unique family relationships involved, it is likely that a different approach may be required for family businesses.

A family charter can be a useful document to lay some ground rules for interaction between the family and the business, and a family council can act as an effective medium for managing communications. A family business specialist will be able to provide guidance regarding options relevant to individual circumstances.

Research has shown that businesses that implement formal governance structures before separating ownership from management face fewer problems. It is often during the second and third generation stage of the family business life cycle where systems of corporate governance become most important, as shares are often passed to family members that are not actively involved in the management of the business.

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Good communication between the board and the family shareholders will reduce the likelihood of disputes borne by mis-understanding and mis-trust. This will also facilitate parallel planning of the business objectives alongside the family objectives.

Appointment of an independent chairman and non-executive directors can add some formality, bring some external perspective and diffuse potentially explosive situations.

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It is therefore important to seek advice early on from a family business specialist. An experienced professional can help guide you through the various options for bespoke structures relevant to family businesses. This process should help to gain buy-in from family members to key principles and objectives and will help to draw the lines between business decisions and family life.

Reducing the potential for conflict and court appearances must be good for both the business and family relations.

• Steve Scarlett is a partner at Lovewell Blake

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