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16 July 2016 Posted by 


Strength lies in relationships

By Justin Dowd
Partner Watts McCray Lawyers

FAMILY businesses are truly the backbone of the Australian economy, accounting for 70% of all Australian businesses with an estimated wealth of $4.3 trillion.

The value that is given to the economy is therefore enormous, in employment, the provision of goods and services and in fostering family relationships.

Many readers will be engaged in family businesses. These can be set up as a sole trader, a couple in partnership or sharing a company structure, to engage children and/or siblings and for the benefit of multiple generations of the same family.  

The fact that family businesses are often founded on personal relationships is one of the strengths of those businesses. There is (at least at the start!)  inherent trust, understanding, flexibility and compatibility.

Family businesses are often home based, with the finance provided by the founder/s and this is clearly easier and can be more flexible when close family members are involved.

However there can be downsides in a family business. Communication between family members can be taken for granted, leading to misunderstandings; relationships can fail; other personal circumstances can occur.

Businesses are conscious of the need to have insurance against various risks. Consideration has to be given to the possibility of untimely death or debilitating injury of the principal operators of the business.

Most people understand this but what if parties separate or divorce? What happens to the business then? What happens to the assets, as well as the liabilities of the business in that circumstance?

If the business involves more than one generation, this can become even more difficult.

Protection of the business can be achieved by having a considered structure; the best solutions for which are generally for the parties to enter into either a Financial Agreement or Deed of Family Arrangement that covers these possibilities.

Other legal issues arise: loans and advances of money should always be properly documented to avoid uncertainty at a later point.

Wills should be checked to see that the business assets are left in the way that the owner really intends.

Care must be taken to enter into financial and other legal contracts in the right names at all times.

Guarantees should only be given where necessary and with all parties fully understanding their meaning and potential obligations.

Company records, including the company's constitution should be carefully kept.

Succession planning can become more difficult and very personal in a family business environment; arranging finances can also be problematic. 

These problems should be considered in advance and dealt with in a logical fashion.

Statistically, only a third of family businesses has a formal "Board" structure, only 12% have a "family constitution" and 20% have a succession plan.

These may never be needed, but if things go wrong, it will be too late then to try and attend to them!

Finally, hopefully having got past all these potential pitfalls, the successful business owner will want to retire, securing sufficient capital and income from the business to do so; and putting in place the best ownership structure for the next generation. 

This requires careful legal, accounting and financial planning for the benefit of everyone involved.









Publisher and editor, Michael Walls.
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Western Sydney Business Access (WSBA) covers the business and community issues of the Greater Western Sydney region of Australia. WSBA is the popular media source for connecting with the pulse of the region and tapping into it's vast opportunities and networks.