The Business of the Family
In this new chapter, I’m starting work with and have conversations with several businesses about succession and what legacy the owners or custodians want to leave for the future. These businesses vary from first-generation in their early years seeking to define what they want the business legacy to be to mature companies navigating the integration of the second and third generations into the business or family office.
Increasingly, I appreciate more where there are gaps in services to assist businesses beyond the usual accounting and legal advice they engage (there is nothing wrong with this so long as it is good advice). Advisors who can coach and assist with shaping the business in conjunction with an established or new advisory team to help families navigate succession challenges and growth.
All businesses have unique attributes and personalities that define them, and family businesses are no different with the added complexity of the family. Family businesses comprise 70% of the businesses in Australia, which is more or less similar worldwide, with numbers marginally higher or lower depending on the region. Statistically, 70% of family businesses either fail or are sold before the second generation gets the opportunity to take over. Only 10% remain as active privately held companies for the third generation to take the leadership.
Often, family businesses are started out of the want for financial freedom, to pursue a passion, an idea or by complete accident. In many cases, one of the primary motivations is providing opportunities for the family for decades, benefitting multiple generations, and leaving a ‘legacy’. How this is defined is profoundly personal and varies greatly.
As family businesses grow over the years, so does the family that depends on the business to meet their needs. In businesses where the intention is for the next generation of family members to enter, it is vital to consider how the business will support these families in the coming years.
Consider that the founders comprise two (or more) family members. Whether they are husband and wife, brothers, sisters, cousins, etc., there is a substantial chance they will have children and grandchildren. If the founders wish to welcome family members into the business at some point in the future, planning for this and how this process will be undertaken is critical. There are some key questions to be asked before going on this journey to ensure the business (and family) has the best chance of potential success for generations to come. The context will vary depending on the business size, yet the same considerations should be made:
What education, qualifications or experience must obtained before working within the business? Can these be obtained while working within the family business, or must they gain experience elsewhere?
It’s an emerging trend that family businesses require a family member to gain a qualification or work experience in other companies and a minimum age before eligibility. There can then be several layers, i.e. they must have had several promotions, lead a team, additional soft skill training, etc. In many larger businesses, they are asked to apply alongside non-family candidates and go through the same recruitment process. Sometimes, they will not be selected as the preferred candidate and must work elsewhere until another opportunity arises.
Can the business support a growing family? How many family members can the business afford to support them as employees?
As we discussed earlier, planning for integrating family members is essential for the business's potential success and financially supporting its family members. Albert Einstein once said Compound Interest is the 8th wonder of the world. For all the wonders it provides when investing, there are potential adverse effects on multi-generational family businesses under increasing pressure to employ family members, which can be terminal. For example, if the married founder had two children who each married and then had three children each, each of whom married within three generations, there are 18 family members, including spouses who are working or looking to work in the business. Can the business scale to support the family and its other employees?
Family members entering the family business must be managed thoughtfully and with good processes. Some will get lucky without any planning, and the success will vary depending on the size of the business, the family, the industry, timing and our differences as human beings. It is essential to manage any family members’ expectations before entering the business, and equally important is to manage those outside the family business. Hence, everyone within the family understands the expectations if they wish to join the business. Even if they never work in the business, they will likely be impacted in some form due to its success or lack thereof.
There is no escaping the fact that family and business will always meld together in the world of family business. They are fantastic environments (for the most part) and contribute hugely to society on multiple levels beyond the family's financial outcomes. They provide valuable contributions to communities, innovation, employment and countless other benefits. A key to ensuring this compounding value lasts generations is effectively managing succession and family integration in the business.
Family businesses generally have long-term views compared to the shorter incentive structures in non-family businesses due to different incentive structures and visions of the family. For this long-term thinking to succeed, the business must balance the interests of the family and the business when recruiting or managing existing family members. Therefore, engaging experienced independent non-family member support is beneficial to help ensure the right policies are in place to assist the business to ensure the business is in the best place to succeed.
This discussion only scratches the surface of the numerous elements it takes to navigate succession effectively within any size organisation. However, it highlights valuable considerations that must be considered when planning the integration of family members.
Always remember the positive impact a fresh perspective and independence can have, whether that be the family business, family office or organisation. The opportunity to grow and build resilience within any organisation is always available; family businesses are no exception. Be open to new ideas and objective thinking, and with sound planning, trust the process.
And as Dad would say…Above all else, it should be fun.
AV
