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”. Often they start as a small business founded by a parent or a couple who want to give their children work experience doing small tasks – answering phones, filing, sweeping up the office, etc. From simple beginnings can spring a legacy that transitions from generation to generation.
Assuming a solid foundation has been built, family businesses can be a huge success. Family-based business culture and shared values can provide strategic direction, continuity and customer appeal. On the flip side, closely held business owners may face unique challenges when family members are active. Varying goals, personalities, expectations, family feuds and politics can all play into the mix; however, they can be managed with proper structure and thoughtful planning.
Like any other family business, if a family-owned real estate company is built on an organized and solid foundation, it will be ready for all the challenges the business may encounter. Several key aspects of business structure are therefore important:
Communication Is Fundamental
In any business, family or not, there are always differences that exist in the views and opinions of members in the workplace. In a family business, small differences among the related business owners can create family feuds, affecting whether the company will survive long-term. Sometimes 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 advertising 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. Family and business strategic planning and regular family meetings with the aid of a family business coach 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. A “family office approach” led by a trusted advisor who facilitates family meetings may be most effective. 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 reporting on the current state of the family’s finances.
Who’s In? Who’s Not?
A strong business and legacy can be built and maintained only if there are willing participants, performing clearly defined roles with proficiency. 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 the success of the business may depend on a quality or skill not present in the family unit. Non-family employees may add balance to the organization because they can view the business from an unemotional position.
Succession Planning
If you take only one thing away from this discussion, it should be this: If you intend for your business to transition from generation to generation and you do not have a succession plan in place, now is the time to develop one.
Without a succession plan, the company can close faster than it was built. The numbers tell the story. 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 the 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 needn’t be a daunting task and is best constructed with the assistance of a third-party professional or business advisor. Like other family businesses, family real estate companies need to start succession and estate planning early, help children and other family members find their place, create financial structures that work for all family members and maintain open communication among the members during periods of transition.
Founders, in particular, may not want to let go of the company because they are afraid the successors are not prepared, or they are afraid to 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 would include 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 into the closely held business model can provide both strength and challenges. Family business research has established that generational transition is the highest risk for continuity and that the vast majority of families in business fail to effectively deal with it. The good news is that failures can be prevented by appropriately and comprehensively preparing for generational succession. A concrete succession plan along with mechanisms for communication and guidelines for leadership and management positions form a strong foundation for success of the family business.
___________________________________
Marc J. Minker, CPA, PFS is the CBIZ MHM Private Client Services National Practice Leader. He can be reached at 212.790.5700 and mminker@cbiz.com.