It is likely that some family members will be involved in both aspects which heightens the challenge of distinguishing the return.
There are several ways for family business owners to approach these challenges.
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1. Compensate performance fairly
Non-family employees are often critical to the success of a family business and remuneration practices that unfairly benefit family members can create resentment among employees, making it difficult to recruit qualified workers. The Family Business Survey 2021, conducted jointly by Grant Thornton Australia and Family Business Australia and Family Business New Zealand, identified that 60% of businesses expected to increase employee numbers in the next 12 months. The non-family employees may resent being paid less or not receiving similar benefits, which could in turn impact the culture of the family business. Industry benchmarks are an excellent way to establish roles, expectations, and salary levels, ensuring that competitive wages are paid to all employees.
2. Clear Financial Metrics for KPIs
Quantifiable KPIs for a business' daily operations may be as simple as setting target sales for every quarter, or putting limits on certain types of expenditure. What is important is to formally document these KPIs and ensure that they are regularly reviewed. This may help reduce the risk of disputes and, if set up properly, should better align results and rewards. If the family owners cannot agree on such an arrangement, they can bring in a third-party business consultant who can help the family devise a method of sharing economic rewards that is both reasonable and sustainable.
3. Align Risks and Rewards
Holding discussions for potential scenarios for capital injunction and any guarantor agreements in place. As important as it is for families to meet, discuss and agree on a remuneration plan for the future of the business, we cannot stress enough the importance of preparing your plans together as a family, ensuring they are aligned and achieve the same outcome.
4. Have clear exit strategies for passive owners
Consider adopting buy-sell mechanisms that facilitate buying out the interests of family members who are no longer employed in the business. This can be particularly important for service businesses that rely more on human capital than physical or financial capital.
How can we help?
Guided by years of experience and the knowledge of countless family businesses, an independent facilitator can help to establish the structures and forums to address conflict, but more importantly enables families to have open and honest conversations about the direction of the business.
At Grant Thornton we work with all members of the family within the business to make sure everyone’s wants and needs are met, and outcomes are aligned with each of the family member’s objectives to the benefit of the whole family.
