Family businesses are an often overlooked form of ownership, yet it is estimated that 90 percent of all U.S. businesses are family-owned, and one-third of all companies in the S&P 500 index started as a family business.
Family-based business culture and shared values can provide strategic direction, continuity and customer appeal. On the flip side, these businesses may face unique challenges when family members are active. Varying goals, personalities and family politics all can be in the mix. However, if a family-owned company is built on an organized and solid foundation, it will be ready for the potential challenges. Several key aspects of business structure are therefore important:
Communication is fundamental
Small differences among related employees can escalate into family feuds, affecting the company’s longevity.
Family members may find it hard to express their disagreements. For example, a son, fearing rejection, may not tell his father, the founder of a successful company, that he sees a different business direction. Scenarios like this are common. They can be detrimental to the company’s future and disrupt family harmony.
A “family office approach” led by a trusted advisor who aids in strategic planning and facilitates family meetings can establish a productive communication structure that not only helps resolve differences in management styles but also fosters a culture of inclusion and responsibility. For many families, particularly when elaborate tax and estate plans are involved, communication regarding financial affairs will also be important. For the benefit of younger generations, these discussions can include information on the origins of the family’s wealth and creation of a vision for its future stewardship, as well as the current state of the family’s finances.
Who’s in? Who’s not?
Problems can arise when family business owners are tempted or pressured to promote family members who lack adequate skills. In addition, offspring may be reluctant to join the business in spite of the founder’s plans. These issues need to be considered delicately, honestly and often.
Every business needs a good mix of people to help it operate and grow. Many founders initially intend to restrict outsiders from high-level positions, yet success may depend on a quality or skill not present in the family. Non-family employees add balance to the organization because they view the business from an unemotional position.
If you take only one thing away from this discussion, it is this: If you want your business to transition from generation to generation, you absolutely must have a succession plan in place.
Without one, the company can close faster than it was built. According to Nancy Bowman-Upton in the Small Business Administration publication Transferring Management in the Family-Owned Business, only 30 percent of privately owned businesses make it past the first generation. Yet, at any given time, 40 percent of U.S. businesses are facing a transfer of ownership issue. Sometimes this is due to succeeding family members not having interest in running the business, but in most cases it is due to the absence of a succession plan.
Developing a structured plan is best constructed with the assistance of a business advisor. Succession and estate planning need to start early. This will help children and other family members find their place, create financial structures that work for all and maintain open communication during periods of transition.
Founders may not want to let go of the company because they are afraid the successors are not prepared or that they will be left without a formal business role. It can be helpful to start planning with the end in mind by determining when and how the founder or other family members in key roles will retire or leave the company. A realistic timetable includes training and mentoring the next generation, involving non-family members in the business operation when appropriate, and establishing a predictable and orderly succession of authority and ownership.
In the end, it’s a business
Like any business, a family business must have a solid business model. Injecting family ties can provide both strength and challenges. Research has established that generational transition is the highest risk for continuity and that the vast majority of family businesses fail to deal with it effectively.
The good news is that failures can be prevented with appropriate and comprehensive preparation. A concrete succession plan along with mechanisms for communication and guidelines for leadership and management positions form a strong foundation for success.