With less than 30% surviving to the third generation, family businesses face unique challenges if they are to thrive into the future.
Despite successful beginnings, family businesses do at times struggle. This is sometimes a result of second and third generations insisting on running the company even when they are unsuited to the role. In other cases, it’s the reverse and although the number of family shareholders increases exponentially generation by generation, the commitment to carry on as owner of the business is not always there.
To maintain success as the business and the family grow, a family business must:
- Achieve strong business performance
- Keep the family committed to, and capable of, carrying on as the owner.
Preparing your family business for success
To prepare your family business for future success, the first step is to understand the intertwined challenges of family and business performance and to put a structure in place that separates the decision making from family investment decisions and other family issues.
Your 6-step plan
When putting this structure in place, you will need to consider 6 major areas.
- Set up a family office. Set up a competent and enthusiastic family office by appointing a family member to take charge of the family’s outside investment and philanthropy interests. Having a family office also ensures family values are maintained for years to come. Your business advisor can support your family member by offering guidance and support as well as maintaining records and providing regular reports.
- Reach a mutual agreement. Work with your family to create a constitution that reflects your family’s vision and plans for the business. For example, some families want the business to offer employment opportunities for their children; other families want the best person for the role and an income stream from the business for future generations. Your family needs to discuss and document all these issues. This will ensure all future decisions will come back to the constitution and the family’s desired direction.
- Distribute capital. Outgoing generations need sufficient funds to be financially secure while leaving enough capital in the business to benefit – rather than trap – their successors. To ensure you create the right balance, it’s wise to seek professional help from your financial advisor.
- Foster business and life education. Encourage the next generation to continue their education, attend university or learn a trade. Several years working in another business can also help the next generation gain new knowledge and confidence in themselves as well as learn business essentials (such as how to read financials). Mentoring the next generation is also important so that they understand and respect their parents values if this is done well, staff will also respect and support the successor.
- Plan for transition and succession. The family needs to address leadership and management continuity issues, including ownership and directions for family wealth. These days, generations often work side-by-side, rather than one generation vacating the arena to make space for the next.
- Separate decision making. So that the business remains free to concentrate on business decisions, family issues (including those of ownership) need to be dealt with in a dedicated family environment.
A strong business and happy family takes resources, commitment, effort and careful planning. While sustaining the family business into the future can be challenging, the rewards are worth the effort – according to recent Kinsey research, those family businesses that do survive into the third generation tend to perform well over time compared with their corporate peers.