DJM Solicitors

Five Family Business FAQs

Starting a family business is an exciting opportunity. However, sometimes it can bring along certain challenges and issues, from personal to commercial, which some families can be unprepared for.

Below are five questions, which may arise when running a family business:

1. What are the most common problems with family businesses?

Personal family conflicts are among the most frequently occurring incidents when it comes to managing a family business. For example, tensions may arise between the family and employees who resent favouritism (real or imagined) shown to members of the family.

2. Are there any restrictions on employing family members?

Unless there is a legal obligation to have specific experience or qualifications, there are no restrictions. However, you should encourage your family members to meet the same entry requirements as other recruits to avoid any resentment from other employees.

3. What issues should be covered in shareholder agreements within family business’?

A number of potential issues should be covered in a shareholder agreement in order to avoid conflicts and misunderstanding. They include:

• How directors are appointed;
• How the board will make decisions;
• Conflict and dispute resolution procedures;
• Rules and regulations restricting shareholders working with competitive business;
• How the business will be financed;
• How profits will be distributed;
• Rules enabling protection of confidential information;
• Rules and regulations of transferring shares, including the case of a shareholder’s death;
• Rules and regulations regarding employment of family members;
• Rules and regulations enabling protection of external shareholders.

4. How can I keep control of the business in case of a divorce?

There are certain steps you can take in order to protect your business in case of a potential divorce. You may want to establish suitable terms in your shareholders’ agreement and pre-nuptial agreement.

It is worth noting that, in the event of a divorce, a pre-nuptial agreement can be overridden if a fair financial settlement is agreed between the two parties.

This is a very complex area, and we would advise seeking guidance from a professional if this issue should arise.

5. How can we attract additional financing into a family-run business?

As with any business, you need to convince external investors or lenders that the business has good prospects.

If you require a loan, your lenders will require a guarantee of payment, this could mean offering the lender security in the form of a mortgage over a property.

If you are seeking outside investment in shares, you must guarantee fair treatment and you may have to enter an additional shareholders’ agreement, which will give investors additional protection.

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