Getting Ready for Succession—Part I & II
Part I
Succession within family businesses has been a hot topic in the past few years, and it will be more important than ever in the years to come. Based on current demographics, there will be an unprecedented turnover in family business leadership over the next 10 to 15 years as baby boomers retire. Some business owners will choose to sell their business, while others will pass their business on to the next generation. No matter what option you choose, it’s never too early to increase your chances of a successful transition. To achieve this, it helps to have both an effective family business and harmonious business family.
There are two key tools you can use to strengthen your family and your business - family councils and the professionalizing of your business. In this article, we focus on steps you can take to professionalize your business. In a future edition of the Tax Factor, we’ll take a look at the value that a family council can add.
Improving Business Strength: Professionalizing Your Business
What professionalization really means is exploiting the advantages of carrying on an entrepreneurial business, while managing the weaknesses that can arise in family businesses. The object will be to add professionalism without losing the strengths of an entrepreneurial business. So, it’s worth taking a look at the general strengths and weaknesses of family businesses.
Family Business Strengths
Commitment - Family business owners are passionate about their business, and this passion translates into dedication and commitment, which extends to all the family members who come to have a stake in the success of the business. Family enthusiasm can spread to non-family members too, as these people care more about their role and feel they are part of a team.
Knowledge - Family businesses often have technological or commercial know-how not possessed by their competitors. In addition, they are better at keeping this special know-how within the business.
Flexibility in work, time, and money - Many family businesses can perform the work first, and figure out how they’ll be paid for their work later. This flexibility leads to a competitive advantage.
Long-range thinking - Family businesses tend to be better than other businesses at thinking with a long-term view (although getting these thoughts on paper can be a challenge for some).
A stable culture - Family businesses tend to be more stable when compared to other businesses. The leader has usually been in place for many years, along with other key members of the management team. Relationships within the company usually have ample time to develop, so everybody knows how things are done. But this advantage can become a disadvantage when a business becomes set in its ways.
Timely decision making - In a family-controlled business, responsibilities are usually clearly defined and strategic decisions are generally made by one or two key individuals. This gives a family business an ability to exploit opportunities quickly.
Reliability and pride - Family businesses are generally very solid and reliable organizations, a fact recognized by the marketplace. Many customers prefer doing business with a company that has been established for a long time, and they appreciate dealing with management and staff that is not constantly changing.
Family Business Weaknesses
Family businesses also share a number of common weaknesses. Unfortunately, these weaknesses are often overlooked.
Intrusion of emotional family issues - Family values can add a great deal of value to a business. However, in addition to the positive aspects, it is difficult to keep non-business family issues from creeping into the business. This problem often comes to a head during the succession process, but it can also affect the day-to-day operations of the business.
Rigidity - Although not true of all family businesses, many practices can become ingrained and family businesses can become tradition-bound and unwilling to change. For family businesses, change involves the usual disruption and commercial risks, but it can also involve overturning philosophies and upsetting practices established by relatives.
Specific business challenges - The business challenges that particularly affect family businesses include modernizing outdated skills and managing transitions. The skills possessed by a family business are quite often a product of history. As a result of developments in technology or a change in the marketplace, these skills can quickly become obsolete. We tend to think of drastic changes in areas such as computer technology as being the major risk, but problems can arise due to more subtle changes over time. For example, the inability to adapt to an ever-changing retail environment was one of the contributing factors in the collapse of Eaton’s.
Succession - Any change in leadership is an important and difficult process that must be carefully managed. For a family business, the issue will be far more complex, as choosing the best candidate can mean choosing one family member over another.
Business First or Family First?
Most of the weaknesses common to family businesses are due at least in part to the interaction of the family and business domains. So, managing this interaction will be the key to lasting success for most business families. Some may use a family-first approach where the interests of the family take priority over the interests of the business. Other families may put the interests of the business first. In many cases, the most successful families are those who can develop a balanced approach. Professionalization is a tool that can help maintain this balance.
How Does Professionalization Fit In?
The idea behind professionalization is to preserve the advantages family businesses enjoy while adding professional business practices to help manage the interaction of family issues with the business. Part of this process will be to add structure to the organization’s business practices.
As an example, let’s take a look at a contentious issue that many family businesses face - the employment of family members. Where policies don’t exist, decisions on who will be employed in the business and who won’t can become arbitrary. In addition, family issues such as the financial need of the individual could overshadow important business factors such as making sure the right candidate is hired to fill a particular position. Unchecked, this could result in having family members fill roles they aren’t able to handle, and can make it more difficult to keep key non-family employees.
However, if specific policies are set before a family member is asked to participate, this will make future decisions seem less arbitrary. Also, all members of the family will know where they stand, and what they must do before joining. Different families will set different policies, so the fact that policies have been discussed and set is often more important than the policies themselves.
Most families will set policies in two key areas. First, will in-laws be allowed to join the business? Another important issue that most business families deal with is the issue of fair pay based on performance. Where policies aren’t set in this area, the need for some parents to treat children equally can result in paying children an equal salary without any consideration of each child’s ability. Where family members are paid equal amounts, the salary can take on the appearance of an allowance, and can cause resentment within the family. Professionalization is one tool you can use to strengthen your business. With stronger and more professional business practices, your business will be in a better position to start the succession process.
Part II
As we discussed in Part I of this article earlier in the year, there will be an unprecedented turnover in family business leadership over the next 10 to 15 years as baby boomers retire. As part of the transition, some business owners will choose to sell their business, while others will pass their business on to the next generation. No matter what option you choose, it’s never too early to increase your chances of a successful transition.
To help achieve this, it is important to have both an effective family business and harmonious business family. There are two key tools you can use to strengthen your family and your business. In Part I, we discussed the importance of professionalizing your business and the benefits that process can provide. In this article, we focus on the value that a family council can add to strengthening family harmony.
What is a Family Council?
A family council is an organized forum where family members participate in the development of their strategic plan and policies for the family. The meetings allow the family to start tackling the “forbidden agenda” and to lay down some clear, sensible ground rules governing the family’s involvement in the family business. Although family members may not agree on every issue raised, each family member will have a voice in the process.
For many families, setting up this process is the key step —as it promotes a dialogue on the issues that the family faces, many of which can be difficult. Without family council meetings, many of these issues may not be discussed. As a general rule, the severity of unresolved issues will increase as time passes, and the options available to deal with the issues can shrink.
An important point to keep in mind, however, is that family council meetings are not meant to replace meetings held by other groups within the business. For example, family council meetings do not take the place of business meetings of the family business’ senior management. The goal of the family council is to set policies involving the interaction of the family and the business, and to deal with other family issues. A family council is generally not the right venue for discussing issues that are purely business decisions.
Who Should be Involved?
When it comes to deciding who should be involved in family council meetings, some prefer to limit inclusion to family members who are active in the business. However, unless there are persuasive reasons to the contrary, the general rule is that the council will be the most effective when both active and inactive family members are included. All family members, whether directly or indirectly, have a stake in the business and it’s best if everyone is fully involved from the start. This will generally help meet the main objective of the family council—to establish a unified and cohesive family approach to the business.
An exception to the general rule can arise for second or third generation family businesses, as more than one immediate family is involved. In these situations, the chances of achieving consensus can often be improved by restricting family council membership to just the key players.
Another sensitive issue is the involvement of in-laws, and there is no right or wrong answer for this issue. Some families involve in-laws in family meetings, and some don’t. When making the decision for your family, keep in mind that in-laws will generally learn of the discussions that take place anyway, so it may be best that the in-laws be present to hear what was actually said as opposed to learning what was discussed secondhand.
What Issues Should the Council Deal With?
Any issue that impacts the family and the business can be addressed by the family council. But as discussed earlier, issues related solely to the management of the business will generally be dealt with by those active in the business. For example, deciding on rules that should be set for the entry of family members into the business would be an issue that the family council should address. On the other hand, those family members who are active in the business would generally deal with setting work hours for all employees.
At the initial council meeting, the first issue that many families tackle is setting some ground rules that should be followed by family members during future council meetings. Some rules that should be considered are included in the box below. Another issue that many families choose to deal with early on is the development of a family constitution.
Golden Rules for Family Council Meetings
- Listen to each other.
- Try to understand each other’s viewpoints, even if you disagree with what is being said.
- Listen for what is not being said.
- Show respect.
- Say what you mean, but avoid personal attacks.
- Be prepared to explain your reasoning.
- Avoid vagueness.
- Do not interrupt, even if you disagree.
- Avoid making demands.
- Focus on goals rather than personalities.
- Do not over-concentrate on the past.
- Avoid miscommunications such as:
- hidden messages (skirting around the issue),
- misattributions (hearing hidden messages),
- projecting ideas and values on to other people, and
- forecasting conversations rather than actually taking part
How Should We Start?
An excellent way to begin a family council is with a one-day retreat, with family members gathering in a quiet environment away from the everyday surroundings of work and home. A non-confrontational atmosphere will help family members to discuss the issues they face in a constructive way.
Many families also try to plan social events around the family council meetings. Adding some fun to the family gathering will help reduce stress and improve the quality of discussions during the council meetings.
Family council meetings can also be used as an educational forum. Experts in a number of areas such as tax, estate planning, insurance, technology and legal issues can be invited to speak to the council.
Should We Use a Facilitator?
The chances of a successful initial retreat can be greatly improved by asking an impartial person from outside the business and the family to act as a facilitator. Ideally, this individual should be a professional consultant with broadly based commercial and financial experience, who is skilled in managing group dynamics and helping family-owned businesses. He or she should be responsible for setting the agenda (after consulting with the family), chairing the meeting, and ensuring an atmosphere in which everyone feels free to express their concerns.
After the initial meeting or meetings, many families hold subsequent meetings on their own, with family members taking turns acting as the chairperson for the meeting. These families may still call on a facilitator when dealing with difficult issues, or when the family council reaches an impasse on a particular issue.
As is the case with so many other issues facing family businesses, the use of a family council will not provide an instant solution to the issues facing the family and the business. However, it will provide a powerful process that your family can use to tackle the issues that you face.
Common Key Issues For Family Councils
- Code of conduct for family council meetings
- Involvement of family members in the business
- How will we decide on who can join the business?
- What preparation or qualifications are required?
- What if the employment of a family member does not work out?
- Can in-laws join the business?
- Compensation and ownership
- How will we evaluate and remunerate family members?
- Who will be allowed to participate in ownership?
- How will we deal with a divorce?
- Family harmony
- How will we deal with conflict between siblings and
generations?
- How do we educate in-laws on the business and
traditions of the family?
- How do we deal with family members with financial
or career problems?
- How will we keep non-active family members more informed and involved?
- What responsibilities do we have to the community?
- Management policies
- How much financial information should be shared among the family and employees?
- How do we retain good non-family employees?
- Leadership succession
- How will the next leader be chosen?
- How will the transition take place?
