You Know The One
(Is it you?)
It is widely estimated that there are over five million family businesses in the United States, that contribute about 60% of the GDP, and about three-quarters of all new jobs created. That means they employ almost two-thirds of the workforce, or approximately 100 million people. Some are publicly owned, many privately owned. If you are involved in one, you know there is nothing tougher.
While every family’s story is unique, the issues facing family-owned businesses and their different generations generally have many common similarities. From the second generation (G2) and beyond, remaining involved with a family business is a choice. It has been said that, “A family that works together, stays together.” Perhaps stated more appropriately, “A family must stay together to work together.” To this end, the general goal for families must be to promote strong relationships whether the foundation for family governance is just beginning to be developed or you are at a point where it needs to be updated.
Attaining a goal like this requires having a resilient family committed to continuing the legacy in order for any governance process to be effective. Selling a business is always an option, taking the proceeds and deciding to invest together or, alternatively, receiving a distribution and each family going their own direction. If agreement is made to take what each has inherited and continue the business for at least the next generation, comprehensive control documents and a transparent decision-making process should be in place.
Unfortunately, words on paper and input from others are not always enough to deliver the desired family unity. All too often there is one family
branch or even just one family member who, instead of being resilient or flexible, is simply resistant or intractable. This may be the matriarch/patriarch founder, or it could be part of a later generation with a controlling ownership and “knowledge” of how things are intended to be. Family businesses can provide a sense of security or feeling of permanency, but many wealth creators and future owners simply want things to continue as is because "we've always done it this way." They have only known success, and find it easier to reject the idea that anything needs to change.
Do you know someone like this in your family that may be holding back or limiting options for future generations? Do you know “the one”? Is it you? It is a natural and recurring process for family businesses that the initial creative spark, interest, and motivation for the business will be diluted and blurred with each successive generation. This demands that the critical work of continually updating strategies for addressing the ever-changing needs of all generations must involve everyone. Failing this, many family businesses are destined to destruct when one tries to direct the destiny for all.
Advance preparation is always preferred, but even if you are past that point and conflict is present, it is never too late to begin. To quickly review, the three pillars for sound governance of any family business are:
A strong family committed to continuing the legacy.
Creation of governing documents.
Transparent process for making decisions.
With these in place, you can raise the process to the next level. Steps to take include:
Differentiating ownership from management. As ownership is conveyed to each next generation, it is unlikely all owners will have experience with the business, yet owners have the power to sustain, or destroy, based on decisions they make. Receiving an occasional or even regular distribution does not necessarily entitle any owner to have input in the day-to-day operations of the business, even when they believe they know more than their cousin or niece who is the current CEO. Regardless of childhood relationships, birth order, or other perceived family hierarchy, owners need to understand when their vote is considered equal, and when business decisions should be deferred to management.
Plan for succession. Future generations that have an interest in leadership opportunities obviously must be engaged with the business. Future owners, especially if no interest in being involved with the legacy business, must also plan for the handoff and transfer of wealth. Everyone will have a role, and the family will move together – succeeding, or failing. Communication and education are keys for families moving forward.
Limitations, and rotations. For corporate boards, best practice is for a Board of Directors to have an age-based mandatory retirement policy. For family boards comprised of family members, it is best to add to this a maximum number of terms any one family member can serve. This forced rotation allows for fresh perspectives and inputs, and greater involvement from the larger family or younger generations. All serving shall make decisions in the best interest of the family business continuing, while considering the changing needs of the family.
A family’s identity is closely aligned with its shared values, which should be appropriately articulated in the governing documents. Understanding these values, good communication, mixed with involvement and participation are difference makers for family businesses to provide a sense of security and permanency for longer than the span of one generation – and longer than the roadblocks from the one who can’t see the need to unite the family.
It will be the future generations of our families that live with the decisions and process we begin (or choose not to begin) today. When they look back to prior generations, will they say you were the one who could not look forward, was resistant and intractable, and began the decline, or will you be that other one who provided the all-inclusive, strong, decisive governance that setup the business to remain viable for at least another generation?
Thoughts on next steps:
Start where you are. You do not have to be the controlling owner to move the process forward. Don’t force it. It needs to fit your family. It doesn’t have to be complicated, so keep it simple. The key is to start, and where you are today is the best place to begin.
Engage an independent advisor. While your family is unique, and has an amazing story and history, families are families and many face similar challenges. Having someone with specialized experience, knowledge, and independent thinking can be a valuable partner.
Establish a forum for discussions. There is a role for everyone. Encourage honest conversations, without judgment. It’s not a marathon, but a relay. Know that in the end you will be stronger together, and more will participate if they feel they can be heard.
Include everyone that wants to be involved. From G2 and beyond, remaining engaged in the family business is a choice. Work with those who are willing, and allow those who want out a strategy for exiting. (They can leave the business, but they aren’t leaving the family.)
Be clear. Decisions will have to be made, and it is unlikely any decision will be made that is agreed to by everyone. Listen, include, and make sure all understand how decisions will be made.
Commit to the process. It may be like a roller coaster ride, with all the ups and downs, twists and turns. It is a continuous process, that must be repeated over and over as the family grows and their needs change. It will take time and great effort, but sticking to the process will lead to progress.
Jay Baughman is the Founder and President of CJN Advisors, LLC, a firm that provides board, management, and business advisory services for family businesses. Baughman has extensive experience in leadership and governance, with a proven ability to find creative solutions and deliver strategic results.