How does one succeed at managing, growing and transitioning a business and wealth while caring for the family and its legacy?
Whether you are a founder or a next-generation owner-operator you will be confronted with this age-old question.
Here are the Top 10 Steps that can help you with this question.
1
Define the Legacy and the Future of the Business
Many successful families create legacies. In families that manage multigenerational family businesses, legacy is often deliberately built, enhanced and passed from generation to generation. For family business owners, legacy is about more than what it means to be a member of the family. It extends to the role the family business plays for its employees and the communities in which it operates.
2
Know the Value of Business
Knowing the value of business is as important as knowing the value of any other asset the family may own, including real estate, investment portfolio, etc. Determining the value of the business is the starting point and an integral part of any planning process for capital policies, distributions, buyouts, transfers, successions, etc.
3
Establish Capital Policies
Capital policies are an important component of any business. For family businesses, these policies address important topics like allocation of capital, permissibility of raising equity and resultant ownership dilution, leverage, selling and redeeming shares and shareholder distributions. As an advisor, capital allocator, and a private company, our firm has a deep knowledge of working with family businesses to frame these policies.
4
Systematize Distributions to Meet Family Liquidity Needs
Many family businesses have family members who own shares but do not work at the company. As such, it is important to set policies for generating liquidity for shareholders and communicate them effectively. Family shareholders want to know if they will receive distributions and if they can redeem or transfer shares. They also want to have a voice in return expectations inherent in owning shares. Successful businesses often extoll the virtues of long-term ownership for family members and how patient capital can benefit the value of the business and family over time.
5
Establish Governance, Advisory Boards, and Systematic Communications
As family businesses grow over time, the number of shareholders across generations tends to increase. In many cases, the majority of family members who own shares do not work for the business. Yet, as family members and shareholders, many want to know what is transpiring at the company. They also have a right to access shareholder information about their ownership interest and the performance of the business. For that reason, communication with family members who do not have a role within the company is key. Many family businesses seek external objective advice from independent parties or family members and create family advisory boards or a board of directors. The benefit of receiving impartial advice not only increases communication between the family shareholders and the company, but also may result in higher productivity and happiness.
6
Balance Competing Interests
Most companies at some point face the challenge of balancing competing interests among stakeholders, and family businesses are unique in that the family is one of the key constituents. While competing interests may be inevitable, creating a protocol for addressing them and encouraging communication among all relevant groups is paramount to resolving issues. When consensus is unattainable, engaging outside parties to facilitate discussions and act as an objective sounding board can lead to resolution.
7
Adopt Employment Policies
All businesses that reach a critical size should have employment policies. For family businesses –particularly those owned by large multigenerational families – employment policies are more nuanced. One critical consideration that family businesses must address is who from the family will work in the business and the parameters for doing so. Setting an appropriate policy for the business and family and communicating it leads to companies that employ the best-suited people in the most appropriate roles. This also fosters an understanding of what it takes to work for and succeed in the business.
8
Create Succession Plan
Most enduring businesses consider and plan for management succession. For family businesses, this topic can be particularly pertinent, especially where management is deciding between multiple family members or a nonfamily member as the heir apparent CEO. Management succession for family businesses tends to have an additional level of complexity because it must balance the traditional challenges of having a successful plan with the family dynamics inherent in a family enterprise. Family businesses also face the challenge of ownership succession. In many cases, the next generation of owners may not be employed in the company, though they will be shareholders. This can lead to issues in the absence of a clear articulation of long-term objectives and a carefully considered set of share ownership and transfer policies.
9
Establish Strategic Estate Plan
Estate planning plays a vital role in the perpetuation of a family business. Considering the rapid change in business dynamics, if family business owners don’t update their estate plan, it becomes old or outdated after a few years. Adding to this, circumstances in families and relations among family members, business matters, net worth, etc., tend to change irregularly or over a period of time. This is when estate planning comes into the picture. It doesn't matter how complex an estate plan is. It's better to get a customized estate plan as long as one's legally competent. It will also ensure safe passage of family business from one generation to another without any dispute that may further damage the prospects of growth.
10
Build a Support Team
Family businesses benefit meaningfully from having a network of external advisors. Many families find that investing time to identify and nurture relationships with other families, contemporaries and professional advisors is of great benefit and value to the family and the business.
