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Is your family business built to last?
Will your family business survive to the next generation and beyond? Australian studies have shown that in many cases this will not occur. Most family businesses do not have a policy of remaining family owned, and many foresee the family relinquishing management control in the future. Most have not documented management succession plans and there is a widespread belief amongst family business owners that younger generation family members are not as interested in the business as the older generation. This has led to the conclusion that survival rates for family businesses are likely to be low.
How can you change this for your family business?
Sustaining family ownership
Families in business are faced with a range of issues that need to be addressed to sustain family ownership for the long term. Families need to take a long term perspective, manage and plan for predictable transitions, develop a family view of stewardship, and generate entrepreneurial growth as the family and its needs expand.
The desires and objectives of families in business differ from those that apply to non-family enterprises. Families in business most often take long term views, and will exchange short term expenditures and forgoing of profits for long term sustainability and wealth creation.
Families need to actively manage and plan for transitions to other generations, or if this is not applicable, the transition to an external party that is not family related.
The family view of stewardship (the holding and nurturing of the family wealth) needs to be discussed and focused on. The concept of stewardship should be actively promoted by the family, and pursued by all members, whether involved in the business or not.
Families need to focus on whether they will grow by natural means, or by acquisition. It is critical that the family business continues to grow as the number of family members and those that the family supports either directly or indirectly expands. For example, a family business may acquire another business in a similar industry but a different geographic location, so that some of the family members will have the opportunity of growing and expanding that business, but the family stays together working for the common good.
Focus
Family businesses make up a major part of the world class research by such authors as Peters and Waterman, and Collins. We often hear about public companies and the way that they do business, but less is written about larger family businesses such as the Fox and Pratt family conglomerates.
Families need to cease thinking that practices in family businesses should be any different. They should be the same, but include the family dimension in their various considerations.
The family business has at some point been commenced by a founder owner, who has had a personal vision, exercised ad-hoc governance and management, and been able to grow the business to a sustainable level. Usually in the transition to the next generation, we see the professionalisation of the business, formalisation of business systems and strategies, other members of the family or siblings becoming involved in ownership, and consideration regarding how the family works as a team. As the number of family members involved in the business or supported by the business grows, we observe diversification, the involvement of professional managers, introduction of formal governance, family branches being established, and a focus of sustaining profitability due to the importance of the businesses to the family.
This is an evolutionary process which in profitable family businesses has been very successful. These families have been able to identify the family, business and ownership matters, and put in place systems whereby these 3 major aspects interact effectively.
Families are challenged to deal with generational transitions, the need for communication and decision making, and often the family makes a major shift from being a family business to a family enterprise. This may involve the family owning several businesses.
8 pro-active family business practices
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Articulate a clear and powerful vision
For the family to remain unified across the generations, it is imperative that there is a strong sense of shared purpose, a clear vision and mission of the family and the enterprise, a firmly established family culture, and values that guide the family conduct. The mission, vision and values should be reviewed and renewed by every generation. This is a process, not an event, and should involve all generation’s and voices. This is a process that shows how the family can work together, reflect, revision and communicate effectively.
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Cultivate entrepreneurial strength
As the business matures, and the family grows, so the business needs to expand to support those involved. A failure to do so will result in general unhappiness in the family, a feeling of not being appreciated and rewarded adequately, a loss of connection with the family mission and vision, and often the desire to disband or cease involvement in the family business.
The family should cultivate their entrepreneurial strengths, particularly in subsequent generations, allow the generation the opportunity and responsibility to grow the family assets, develop an understanding and appreciation of wealth creation, and reward those involved adequately, whilst recognising shared investment and risk.
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Plan strategically to mitigate risks and capture opportunity
You must consider where you want to be, combine the legacy of the past and the entrepreneurial vision of the future, and create both short term and long term plans. All family members should have participation in drafting these plans, whilst injecting entrepreneurial ideas, and create a timeline as to what is necessary to achieve these common goals. The whole family, whether involved in the business or not, should be engaged in the process, with a view of considering and integrating the variety of perspectives, interests and desires.
Some families in business act as a “bank” and finance family members to develop other business opportunities and initiatives. This often is for the common good of the family, and allows for the diversity of strengths, experiences and skills to be recognised and used for the benefit of all family members.
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Communicate openly, directly and honestly
Most issues in family businesses arise from erroneous assumptions, lack of information, the amplification of differences in an emotional way, and the inability to deal with matters directly for mutual benefit.
Many times past family experiences and history remain in the business place, and result in the family business not achieving its potential. If family members embrace the culture and the vision, are involved in effective communication, know clearly the direction, and are provided with proper information and the opportunity to ask questions, they will be much happier to continue to be involved. Otherwise, they tend to become suspicious, angry or upset, and communication is prejudiced severely.
Communication needs to be direct, and at times the tough issues that people want to avoid need to be brought out into the open. Once agreements have been made, they need to be recorded for future reference, and family members need to live up to them.
Family members need to listen with the aim to understand, ensure that everyone participates actively where appropriate, discover, explore and try things out, be prepared to raise difficult issues, respect feelings, tell the truth and have a culture which respects and invites different values and beliefs.
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Build unifying structures
The family business should have proper governance to help the whole family work together effectively across the generations, to transfer business management and wealth, and to ensure family harmony, good investment returns and the appropriate social impact.
The structure used by each family may vary, but should be separated between the business structure and the family structure.
The business structure will involve the shareholders, a formal board of directors, and the appropriate management structure. The family structure will involve the family council, family agreement, and the way the family communicates and acts.
More families should have family councils and agreements. The family council is the forum for discussing and resolving the concerns and issues between business and family, creating family policies, educating family members regarding business, finance, estate planning and interpersonal skills, visioning and developing a strategy for the future of the family and its assets, reporting on family activities, and allowing family members who are not shareholders or directly involved in the family business to have a communication channel. The family council may set out the family’s role in the community.
The business structure should deal with business issues, and involve the representation of the family in the business in a formal way.
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Clarity regarding roles, responsibilities and accountability
There should be a clear differentiation regarding the role and responsibility of family members as the ultimate asset owners or holders of the wealth, and the management of those assets and the enterprise. The roles of family members involved in the management of the business and the board should be clearly set out. There should be clear expectations of the performance, compensation and accountability of family members, whatever their role and position.
A family constitution or agreement may set out clearly the purpose, goals and values of the family and the use of the wealth, guidelines of how to deal with tough issues, continuous development and education, the fostering of harmony and the method for resolving issues, clear direction about the expectations of heirs and the next generation, and policies and plans regarding the use of assets and the distribution of wealth.
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Develop the Next Generation competencies
In South Australia, only a very small number of owners of family businesses are aged under 40 years. This clearly means that as a community and education system we are failing to develop the entrepreneurial skills of generations X and Y, and allow them to be applied to family businesses.
We must help family members acquire skills and knowledge to enable them to make effective decisions and develop rewarding vocations, develop a strong sense of self and confidence, develop family leadership roles, and utilise their dreams and passions to take the family and its businesses into the future.
Some families have a Next Generation Family Board, where the next generation is involved in formal activities which are then communicated to the board of directors.
Research has shown that families that employ the 5+5+5 principle will more successfully integrate the Next Generation into the business, and equip them to take on the leadership required for a successful future. The research has shown that there are 5 stages of Entrepreneurial Learning:
- Exposure (ages 3 -8)
- Hands on (ages 9-15)
- Broadening experience (ages 16-22)
- Entry into a career (ages 23-30)
- Leadership (ages 30-39)
Children in each stage learn 5 skills of:
- Self-starting
- People
- Marketing
- Money
- Leadership
Then 5 steps are used to transfer knowledge to the next generation:
- Continuity is important
- Problem – solution is the way to explain business
- Meet and greet other entrepreneurs
- Create networks with accountants, bankers, lawyers
- Recap and review each business experience
Means of developing competencies of individual family members include internships, starting work at an early age in the family business, work outside of the family business for a period of time, briefings about family ventures, opportunities to meet bankers, accountants, legal advisers and customers, provision of feedback and accountability in their roles, formal career development processes, the setting of a time-frame and criteria for the transition to the next generation, and defining clearly the roles of those who are stepping down from leadership.
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Provide for individuality and exit options
It should be recognised that not all family members will want to be involved in the family business, and that desires, passions and directions change during the cycles of life. The family should provide exit options and the ability to have free choice, and this may involve the separation of equity and wealth from family membership. Each individual should be respected, and allowed to have an individual path if they so choose.
The next generation should be involved regularly in decision making and communication, but there should be a clear set of exit options so that family members do not feel that they are involved in the family business under coercion or due to no other options being available.
We provide this information to set you on the path of ensuring that your family business is BUILT TO LAST.
Please contact us for further information and assistance, or to simply express your view on the matter. Your contribution to research and consideration in these areas is highly valued.
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