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I just want to get this thing over as soon as possible." "After speaking to the best local advisors, I still have no answers to my situation." "You are my family's last chance to try and work together so they can take over the business. If this doesn't work out quickly, I will sell the company."
These are comments from past clients, all wanting to pass their family businesses down to competent members of the next generation. And, as you can tell from their comments, they expected to settle the situation as an event, not a process. Unfortunately, planning for family generational transition of assets (including the business, real estate and investments) is not something to rush. Just as building the assets took time, planning and decision-making, so does passing them on from one generation to the next without suffering family dissension, jealousy and envy.
Working with families to help them orchestrate how to pass their "prize possession"—the family company—to the next generation is anything but a cookie-cutter process. However, after working with business-owning families over the years, my firm has found several steps that help them to be successful:
1. Find a common vision.
Many families and companies are like a ship without a rudder—they go where the wind blows them. To remain successful, members of the owning family (or families) need to take time to share individual goals and aspirations and to develop a common vision statement for the entire family, as well as the family business. If there is no consensus on such items, chances are opposing forces eventually will take hold of the situation, and conflict between individuals will erupt.
This family vision statement must be structured upon solid values, or what the owning family (or families) decides is right or wrong in a given situation. If the family clearly identifies and articulates these beliefs, it then can establish core principles that will offer guidance and control for key company managers.
Typically, I ask business-owning families to come together for a half to a full-day meeting. The first order of business is to explain how the thinking of decision-makers flows naturally from beliefs to concepts to applications. A family's core beliefs are of critical importance and ultimately will help shape the strategy of the business, as well as the family's vision for business leadership and ownership. Some core beliefs revolve around decisions such as:whether the business or the family should come first; whether the business promotes family unity or threatens it; and if partners are more effective decision makers or using only one person as leader is best. Other core beliefs might influence decisions about running the business debt-free, thinking in terms of high or low risk or using non-family managers versus relatives to operate the company. Then there are the more general beliefs such as commitment,integrity, loyalty and accountability.
One way to develop a common vision is for family members to meet and write down the six most important values they see in the family. The lists should be shared with each person and combined into a single list of core values. Then, examples should be shared of things family members have done to exemplify each core value. From this, families are able to structure a simple but powerful statement about the direction of their companies. One family devised the following comments:
"The obligations of ownership are more important than the privileges of ownership. Social conscience and human respect. Unity of family. Modesty,simplicity and thriftiness. These values remain our foundation."
2. Write a family strategic plan.
Once a common vision has been established, family members need to develop a family strategic plan that will guide them as owners of the company. This plan is made up of policies, some of which might be: employment policies for relatives and family members; conflict resolution policies; and direct and indirect compensation policies, including a perks and distribution policy, guidelines, and qualifications for managers and leaders. Other policies families often develop include those on relationship and communication opportunities; company loans to family members; and misconduct by a relative. Working to develop these policies is time consuming, and no one should expect to be done overnight; however, most find the work insightful.
A predictable pitfall for business owning families, however, is the lack of policies. Eventually, this affects each family member in the present generation and those to come. For example, one family did not believe in meeting to discuss how family matters, such as having relatives present at a meeting who did not participate in day-to-day business activities, would impact the business. I suggested the family meet to create a climate of better communication and improved relationships. The family did not feel this was necessary, and, as a consequence, when the owner's sister came to him and strongly suggested he employ her son (who had just lost his job elsewhere due to stealing), he denied the request, and she hasn't spoken to him since. Bitterness and family division resulted from the founding generation's open-door employment policy.
If family members meet formally once a year to formulate, discuss and clarify policies that support their values and core beliefs, situations like the one above are unlikely. (See "Creating a Family/Business Policy" this page.)
3. Develop a strategic business plan.
Once the family strategic plan is in place, it's time to focus on the strategic business plan. This is a plan that will fulfill the vision and goals for the family firm. Typically, the plan covers the positive features of the company, competitive disadvantages, opportunities for expansion and growth and any negative situations that threaten the company. Additionally, and of primary importance with a privately-owned company, the company's strategic plan needs to match the owner's game plan. Thus, certain questions should be asked of the owners, including:
• Is the family's vision and values inline with the management team's vision for the company?
• Can we separate family membership from business employment and production?
• Will the family support change for the future even though it is risky and costly?
• Does the management team have the necessary skills to manage changes?
• Will the company ensure financial security for the owners in their non income-producing years?
A family's commitment to these questions indicates what management must do to ensure the future health and growth of the business. Once these questions are answered, the management team can proceed with the future business planning process. I normally recommend that a group of top managers gather for two days of meetings to determine the company's mission and goals to support the mission, as well as to define the strategies to accomplish each goal; determine how this activity will impact the business, its staff and facilities; and decide how strategies can best be implemented.
Oftentimes, companies operate for several years in a losing situation, and then realize the old methods of doing business will not sustain the company long-term. The strategic business plan gives the company a road map for the future. After all, who would begin a trip without a plan of where to go and how to get there?
4. Institute a governance structure.
Unless a company has systems of accountability in accordance with its size, complexity and state of development, its long-term solvency will be seriously compromised. As a company goes from a single owner or a start-up partnership to a sibling-run operation, or to cousin involvement, the situation becomes complex. Methods such as a governance structure need to be in place. Support structures include: the family council (the governing arm of the family), the family office (the financial control system for the family), the management development committee (the support for ensuring future leadership), a sibling or cousin task force (a group of relatives who decide if they are committed to leadership in a partnership model format, establishing rules of getting along) and a board of directors (the governing body of the business itself).
• The board of directors consists of the company owner, spouse and child. Directors usually meet quarterly for several hours to support the owner,establish objectives and policies, provide experience and expertise, serve as a force of accountability and act as a sounding board for the owner and a source for open, honest and sensible opinions. The board also is in place to approve new products and services, acquisitions and mergers, and major financial commitments.
• The management development committee includes active members of the family business from both generations (the current ownership and future ownership). Other members might include key employees or outside "risk taking" peers who have been through succession. The objective for the group is to continue and complete the total succession process. Typically, members of this group mentor junior generation hopefuls and offer suggestions for improvement in both their family and business lives. They recommend adjustments in the compensation program and deal with implications of future leadership changes, such as the hand off of responsibilities and authority. Other opportunities might include the timing of passing the gavel, helping the current owner step aside with respect and honor, and serving as a "release valve"for airing out tensions.
• A sibling or cousin task force is made up of those for whom the group is named. Sometimes, spouses are invited to meetings for appropriate support. The purpose of the group is to detail how they will function as partners and managers of the business and operate the business without dad and mom. Topics covered may include: communication processes, conflict resolution policies, alignment of roles, responsibilities and authority, key ingredients that help this group make the partnership work, power and control, accountability matters and alignment of common values and expectations.
• The family advisory council includes family members affected by the business. Topics addressed by this group may include: family and business history, traditions and the role of family culture in the business; estate planning by owners; policies for family members active in the company; performance of investments; civic activities; and other issues discussed earlier in this article.
5. Recognize differences between family and business issues.
There must be a clear separation of the roles of owner, director, president,and key managers, with written agreements developed to spell out each position's authority and responsibility. Each group should identify its expectations of the other groups regarding communications, decision-making and production. For example, formulate a clear purpose for the board of directors in such situations as crisis, poor profit picture or serious family personnel matters.
In the case of smaller companies with one person serving the functions of all management and leadership roles, situations can become confusing for all involved. Owners wear many hats and need to understand what role they are assuming in a given situation. In our earlier example, in which the owner was asked by his sister to hire her son, the sister was coming from a family perspective and the brother from a business point of view. Situations like this can cause families to be separated for generations to come and can affect family companies of any size, from huge corporations to small proprietor ships.
6. Devise an effective leadership and ownership succession plan.
This involves replacing the current leader with a highly trained and experienced successor—a strategic decision for the family and directors. Successions of other management and supervisors are personnel matters and are not as strategic to the company's future. Leadership succession is the most challenging process. It involves finding out who is committed to the business and also requires a good estate-planning attorney to update the will, trusts and any existing shareholders' agreement to coincide with the leadership succession plan. Often, other documents are necessary for creating a limited liability partnership, family limited partnership, trusts to address special considerations, buy/sell agreements, durable powers of attorney, etc. The biggest stumbling block here is failure to make an appointment with a competent attorney.
7. Consider competent non family managers.
Nearing the end of any generation's active involvement in the business, qualified family members/leaders for the future may not be found. In many cases, owners then will look outside the family for competent people. However, attracting the talent and commitment needed is challenging. Why? Most owners will not sell company stock to someone outside the family because of future legal problems, possible court challenges over the exiting price of the stock and management's ability to make a fair profit to pay dividends. Therefore, creative methods such as stock appreciation rights, phantom stock, bonuses or attractive fringe benefits may be necessary. Owners also need to include the non-family member on insider information, create boundaries within which they can perform and give them the power they need to help grow the company.
For companies not organized as a corporation or partnership, where rights to stock are not available, other means are common. For example, give the employee the ability to balance home-life and work-life. Where possible,give the employee opportunities to experience different jobs and positions while providing flexible hours. Provide a competitive compensation package to include health and life insurance, group homeowner's insurance and retirement programs. Offer generous time-off provisions and vacations, profit and bonus distribution, home purchasing assistance and other perks.
Some innovative ways to attract non-family employees include making the company a household name at local high schools and colleges or by hiring an older employee. Offer to make presentations about your company, its services and its employment opportunities to the appropriate departments or classes.
Now that you have the road map to success long-term, you can understand why succession is not a single event,but rather takes time to plan and mature into a successful business operation. Remember, all business-owning families have the same problems and challenges; those who survive are those who do something about them.
Creating a Family/Business Policy
• Determine if you will vote or use consensus.• Choose a simple issue to tackle first.• Look at the parameters and boundaries of the issue.• Make a rough draft of the policy and share it with others for suggestions and revisions. Rewrite the policy until it is accepted.• Make sure the policy wording includes a statement of family values, the intended long-term outcome and the policy itself.• Submit the policy to the leadership/governing body of the business for revision, approval and for legal consideration.
An example of a policy that might be included in the family strategic plan is a family employment policy. Such a policy might be as simple as the following:
Family Employment Policy for Joe’s Quality Floors
• For non-management positions, a high school education is adequate.• For management positions, a four-year college degree in the appropriate field is necessary.• Family members are offered employment, but are not obligated to accept.• The company must have a position available, and the applicant must be qualified.• Three years of successful work outside the family business is required.• The normal employment policy will not be compromised for a family member.