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From family planning to family fortunes – 10 tips for family business success

May 3, 2012

Family owned businesses play a pivotal role in the UK economy. It is estimated that in excess of 75% of today’s businesses are family owned and managed, and between them they employ over half the workforce in the economy. Despite these startling statistics, research shows that 70% of all family businesses do not survive through the second generation, and 8% do not make it to a third.

The research shows that it’s the third generation in the family that presents real problems in the business. The first generation founds the company, and has the drive and the dedication to move it forward; the second generation rides that wave, but the third generation typically wants to do their own thing. They’ve seen the high and the lows, the tensions and the impact, and often want no part in generation succession.

The highs and lows of operating a family firm are well documented. On the one hand the extra sense of purpose, strength of commitment and loyalty between family members working together is often greater than that of everyday employees. Knowing you’re building the business to pass onto future generations encourages the longer-term planning mind-set needed for sustainable growth and success.

However it can also produce a potentially damaging inertia and reluctance to introduce change. Not wanting to take the difficult decisions for fear of the impact on a family member, and the tendency of ‘a job for life’ employment promise for family members, often has an adverse impact on competitiveness. Whilst having to deal with the challenges and turbulence facing all enterprises, family and business issues often become inter-mixed, with emotions and relationships brought from the living room to the boardroom, and as a result can be destructive.

Besides having a well-articulated business strategy and plan, a winning proposition to attract customers and the right level and type of resources for success, given the characteristics of a family business there are some unique considerations when setting up a family business at the outset. Let’s consider these under the framework of a ‘Family Business Charter’ – an informal constitution that provides a framework for ‘how things get done around here’. There are four headings, which in our experience, are the key aspects of a family based organisation that need consideration:

  • Structure
  • Communication
  • Management
  • Succession & Exit Planning

Structure

The legal and operating structure issues can create confusion from day one if not addressed. These include:

  • How are shareholdings allocated between family members? What provisions there are for transferring these in the future, and what is the policy on non-family shareholdings?
  • What are the plans for the development and recruitment of family members joining the business in the future?
  • What are the rights, responsibilities and obligations of family members not working in the business – indeed, are there any?
  • What’s the process for the appointment and rights of non-family managers and board members?
  • Who sets policies regarding training, remuneration and appraisal of employees – both family and non-family members?

Family-owned enterprises can benefit from having a clearly defined share ownership and operating structure that meets the needs of the family and the business. Creating effective and transparent governance enables discussion and resolution of the complicated and often emotional family, ownership and business issues that confront even second generation, mature family companies.

Communication

Many misunderstandings and potential areas for conflict in family businesses arise because of the assumed and informal style of communication. The potential areas of risk include:

  • Family members assume they know what other family members feel or want, both those inside and outside of the business
  • Personal ties inhibit honest and frank communication
  • The head of the family may assume control of the business even if they don’t have the best business skills, and restrict discussions
  • Family-member shareholders not active in the business fail to understand the objectives of those who are active, and vice versa
  • Non-family board or management members feel excluded if there are business discussions closed to family members only

Constructive and productive communication is often in short supply in family businesses, because family members tend to shy away from potentially sensitive issues that they feel might generate unpleasant conflict. But the reality is that such issues can only truly be resolved if they are recognised, acknowledged and discussed at an early stage.

Management

The biggest danger to family owned businesses is that management positions are held by family members only, who lack the skills and experience to do so. There are a number of practical things to consider, for example:

  • Remove personal issues from business discussions by holding all management meetings in a work rather than home environment
  • Appoint a non-family, non-executive director to  provide an impartial viewpoint and help prevent emotions from clouding business decisions
  • Ensure business decisions are taken for business reasons, rather than personal ones
  • Have equality and consistency on the performance management and reward structures for all management, family and non-family
  • Think business, not family when promoting and selecting managers

Conflicts between business values and family priorities can be particularly acute and troublesome in the context of management practices. Clear and explicit criteria must be drawn up relating to personnel issues and family members, and professional management style adopted at all times.

Succession & Exit Planning

The timing and process of handing over the leadership and ownership of the business to the next generation will be one of the biggest challenges. It can be made easier if you plan the succession process early – ideally when you set up the business. An effective way of strengthening a family business is to build cross-generational teams, combining the experience and wisdom of the founder, and the energy, enthusiasm and new ideas of younger family membersThoughts to shape the thinking here include:

  • What are the key goals for the succession process?
  • What is the timetable of the transition stages, from identifying a successor to the staged and then full transfer of responsibilities?
  • Is there a contingency plan in case the unforeseen happens, such as the intended successor leader declines the role?

Questions you should ask include the following:

  • Does my intended successor have the right skills and abilities?
  • Does the intended successor actually want to take over?
  • Is the plan fair to all family members, and does it minimise the potential for conflict?
  • Will family succession be tax-efficient?
  • Is family succession the best option or would an alternative exit strategy – such as a trade sale or MBO – be a better option?

Family businesses are complex and emotion-laden issue of succession from one generation to the next, in terms of both leadership and ownership succession. A structured, well-planned and systematic approach to succession planning is needed in order to overcome all the psychological forces that favour doing nothing.

Drawing up a Family Business Charter

One way to manage potential uncertainty and conflict in a family business is to have a family-business constitution set-up at the outset, and refined during the lifetime of the business, addressing the issues identified above. When well thought through, this document is helpful for family and non-family members alike in understanding the ‘ground rules’.

A Family Business Charter is a statement of underlying philosophies and principles. It outlines the family’s commitment to them, and also gives guidance on ‘how we do things around here’. It is a practical guide for running the business and a framework to deal with issues that have the potential to cause disputes. The process of drawing up a family constitution should be collaborative, involving everybody with a stake in the business, and the document should be regularly reviewed. So what are the key elements in this Charter? Here are some thoughts.

Top 10 Tips:

1. Create an open culture for debate and discussion among family members to determine both the family’s and individual’s objectives. Listen to each other and give everyone a voice.

2. Make sure the family understands the business is a commercial venture that needs to be run in a professional manner. It’s not a ‘plaything’, and respect non-family managers and employees

3. Focus on objectives rather than personalities and personal agendas.

4. Do not accept ‘it has been always been done this way since Grandad’s day’ as an excuse for not making change. When commercial reality requires change, don’t compromise.

5. Individuals’ objectives and needs within the family change over time – respect these changes and ensure they are articulated.

6. Be outward and forward looking. Consider using the services of a non-executive director (not a family member) to provide a more objective view in the planning and decision-making process.

7. Identify which issues relate to family and which to business. Create the appropriate framework to deal with these separately.

8. Succession planning needs to be started sooner rather than later. Five years before a retirement is not too early. Consider all the succession options with an open mind – avoid sentimentality.

9. Consider the aspirations and qualities of family members to identify whether they are potential leaders and managers and consider their training needs.

10. Do not ignore outsiders – professional management may produce higher returns for the family in the long-term than an ill-qualified family member.

Einstein said rejoice with your family in the land of life – alternatively, the thing about family arguments is that you never have to wait long for the next one to put the previous one into perspective! To me, family means putting your arms around each other and being there. A family business incorporates all these emotions, it’s a clan, its a tribe, its a closed network.

Alan Ayckbourn’s play,  A Small Family Business showed the opposite side to the principles of most family businesses. The play exposed the inner workings of a morally bankrupt small family firm, that makes illicit deals from the manufacture of bathroom furniture. The adverse impact of business pressures breaks down the family values and relationships, crushing its very spirit. As Don Corleone, a member of perhaps the ultimate family, said Today I settled all Family business, so don’t tell me you’re innocent, and therein lies the twist, because the journey from family planning to family fortunes, is never straight forward.


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