Many of the businesses SME Strategies work with are family businesses. That is no surprise as I grew up in one and have worked in them and for them for many years. I listened in as a boy to many a family Sunday lunch conversation when my father talked about some tricky area of the family business which was in electrical engineering and founded by my maternal grandfather. I came to realise that key decisions seemd to be taken at Sunday lunch and not in the little used board room at the company’s offices! Family businesses have certain positive characteristics such as flexibility, stability, long-term thinking and giving employment for family members which can be great. But there can be a downside to mixing family and business relationships and if things are not handled properly this can create significant issues for the family, non-family staff and the business as a whole. It can be hard to sack a member of staff but sacking a relative is another ballgame!
In spite of the challenges but more likely because of them, working with family businesses is so rewarding for us at SME Strategies. It combines good business practice with a group of people whose livelihoods are truly invested in the business. Getting the interaction of the family dynamic as creative and empowering as possible benefits everyone and the all important bottom line! One of the key areas is to synthesise i) the needs of the individual in the family business with ii) the needs of the business itself. This synthesis can create a win-win and obviate some of the inevitable tension that will otherwise arise. It can be achieved by exploring ways of achieving ‘both and’ rather than ‘either or’ in terms of whose needs take precedent. This blog explores family businesses a bit more and looks at some pointers to success and how to avoid some pitfalls!
Firstly, what are some of the characteristics of family businesses? Family businesses come in more shapes and sizes than might at first be thought. They may well involve a husband and wife working together. Children of the owners may come into the business and stay for years or decades. A family business typically starts small but may grow significantly in size. Non family members may well be involved. Business can be discussed around the dining room table or in pillow talk. The business can often be dominated by a strong family member who may wish never to retire!
Five key areas to look at are Strategy, Staffing, Conflict management, Governance and Succession planning.
1 Strategy
All businesses need a good strategy and family businesses are no different. A business strategy, or business plan, involves formalising how the business will function in the present as well as in the future. It’s no simple task to create a business strategy for any firm but developing a plan for a family-owned business can be especially complex because it involves a unique set of challenges.
Some of the specific issues involved with creating a business plan for a family business can be:
- The difficulty in separating out family issues from business issues when writing the business plan.
- The willingness of all family members to sign up and follow what is in the plan including agreement between family members on the specific goals of the business.
- Ensuing that family members realise that the plan needs review and adaption from time to time.
- Family members often fail to see the business from the perspective of non-family members (if any) involved in the business.
- In our fast moving world, family businesses need to be able to adapt quickly which can be harder for the family business.
Strategic planning is essential for all businesses not least for the family business if it is to survive for many generations. This means being open to doing things differently as the external environment changes and the market changes. A family business that is rooted in a thought through family business strategy has the best chance for success.
Like all business the family business needs a vision for the future of the business and a plan for determining how the business will get there. A strategic plan is not just a document created and then placed on a shelf to gather dust!
A family business strategy like all business strategies 1) identifies important issues, 2) sets goals, 3) develops an action plan, 4) implements an agreed-upon strategy, and then 5) reviews and renews the strategy.
It needs to take very special notice of the critical issues noted above which otherwise can scupper the ability of the family business to thrive. Like all businesses, the members of the family need to be able to articulate in word and action the strategy of the business.
2 Staffing
All businesses need to develop the talent in their pool of staff but for family businesses this can be quite difficult and specific challenges can be:
- Creating career progression and opportunities for development of family members.
- An acknowledgement that leaving the business is a far bigger issue for family members than for non-family businesses.
- A belief in some family businesses that all key roles must be held by family members – this can result in appointing, for instance, a young inexperienced family member as marketing director over the head of a far more experienced and qualified non-family member.
- A related challenge is when family members fail to see that inability to perform their role needs to result in them moving role or being trained to perform the role properly. The divine right of kings does not work well in family businesses!
- Company policies (especially disciplinary ones) must ordinarily be equally applicable to both family and non-family members of a business.
- It is likely that a family business may well need to have some key roles filled by non-family members.
- A husband and wife (or two familial partners) working together can cause two specific issues: a) business issues can impact on the marriage. It is hard to leave the business outside the front door and not bring it into the home and b) the husband and wife can be collusive and by virtue of their double vote exert undue influence that imbalances proper debate in the business. This is especially true if the husband and wife each hold a senior role in the business.
- A successful family business is likely to grow in size and may do so significantly. It can be hard for the original founder to recognise that the skill set needed to run the enlarged business may be quite different to the skills s/he had to set the business up in the first place.
In my own experience of working as part of family businesses, the effort made in working with staffing issues has always paid handsome dividends. In particular I have seen first-hand how the role of an independent chairman/director/adviser (the specific title is less important than the independent function they serve) can both bring a fresh perspective and also constructively break-up unhealthy family dynamics. This can be the case for example where sibling hierarchy can be unhealthily transferred into a business structure.
3 Conflict management
Every family business will face conflict at some point or another. Some will have more conflict than others. But no matter how cohesive the family business looks on the outside, there is undoubtedly at least a small measure of conflict brewing on the inside. If a family business is constantly in the midst of a conflict, either small or large, then family business conflict management is needed. Learning how to anticipate when a conflict might arise, developing clear guidelines for dealing with a conflict, and adopting effective conflict management techniques may be the only way to ensure a family business ultimately succeeds and prospers.
As explained by Brian Gloom in his excellent article in the Financial Times, if families can anticipate these sorts of issues, and create clear guidelines for dealing with them that everyone supports, that increases the odds of avoiding the pain of conflict and poor decisions. Most family businesses do not make it beyond two generations: power struggles between successors and dispersing wealth and control are just two ways in which a budding dynasty can fall. To overcome this, more and more family companies are drawing up family constitutions, also known as charters or protocols, to help them prosper and endure. These are statements that set out a family’s values, strategic goals and governance. By creating binding agreements on governance, it sets up the playing field for orderly succession, provides clear criteria for decisions, and establishes mechanisms to help resolve conflicts and disagreements before they have ruinous effects.
A family constitution can address several issues such as:
- Who will have control of the family business in the future?
- Rules for separating the family business from the rest of family life.
- How are family members who are not involved in running the family business to be treated and paid (if at all)?
- Who in the family is responsible for specific job responsibilities?
Ultimately, a family constitution is meant to be a binding agreement that holds power. When a conflict arises, family members can refer to the family constitution for guidance on how the conflict should be resolved.
– Keys to success for a family business
According to an article by George Stalk Jr and Henry Foley published by the Harvard Business Review, Avoid the Traps that Can Destroy Family Businesses. To survive over the long haul, family firms need to adopt formal policies about whom to employ, whom to promote, and how to balance family and business interests.
If you want your family business to succeed, flourish, and have the capacity to provide financial benefits to your family members for many years to come, it’s important to understand from the beginning that the owners of a successful family business must accept that there will be challenges along the way. The most important factor in regard to family business challenges is having the skills to handle conflict and being dedicated to creating solutions that will help move the business forward.
- Alignment: In order to prevent conflict, all family members involved in the business must be in agreement on important issues.
- Vision: Family members should agree on the vision of the business. This is often best accomplished by creating a written vision statement.
- Shareholder Agreement: A binding legal agreement is typically an excellent tool to help stave off conflict within a family business.
There are several other key factors that help eliminate the possibility that family business conflict will arise, including: creating an action plan, adopting a family constitution (as noted above), adopting an employment policy that states the terms and conditions of employment, and putting all past conflicts to rest.
4 Governance
The most successful family businesses operate with strict internal policies and a clearly defined structure. One of the best mechanisms for ensuring that a family business runs like a proper business is to have a family business governance structure. This structure overcomes the problem of senior family members controlling aspects of the business that are outside their responsibility or expertise.
Implementing an internal governance structure allows a family business to operate like competing businesses that are not family-run. Effective family business governance ensures internal discipline and establishes professional boundaries that would not otherwise be possible.
If a family business is to function efficiently and to enjoy just as much success as a business not run by members of the same family, it is essential to have a family business governance document. This structure establishes rules and mechanisms for resolving disputes. Family business governance also creates an environment with established roles, which will provide peace of mind for all involved family members.
A family business should not be afraid of bringing in outside senior talent. If the senior members of the family are threatened by such talent, that might be an indication that the family business does not have sufficient self-awareness, maturity and humility to recognise its needs and gaps.
This is where the role of a mentor to an owner in a family business can be invaluable (with perhaps a separate mentor to each key person). A key value of the mentor is to help the mentee differentiate between ‘their issues’ and those of the ‘family business’. In family businesses the two sets of needs can become intertwined and confused leading to and a lack of alignment of goals and misunderstandings can occur. A classic dilemma could be when someone should perhaps leave the business for their own good but the needs of the business would have them stay. WealthBeing is a not for profit organisation affiliated to SME Strategies that is dedicated to providing mentoring support to owner managers.
The Appendix has a list of roles that might be found in a family business governance structure.
5 Succession planning
One of the most important factors that contributes to whether a family business will survive and thrive generation after generation is a well-thought-out succession plan. Inevitably, those who are running a family business today will not be able to continue in their role forever. And if the family wants the business to survive for many decades into the future, the time to start planning for eventual succession is today, not in a few years’ time.
Successful family business succession planning requires the collaboration of every family member currently involved in running the business. A succession plan is something that should not be decided by one or two family members during a closed-door meeting. Instead, everyone should participate and be aware of the plan. The goal is for the family business to succeed, and the most effective way to guarantee success is to embrace the succession process as something that will take time and dedication.
– Planning ahead for business succession is vital
Transferring control and roles within a family business is not always a simple task. In a perfect world, the current leaders of the business are able to come to terms with the fact that they are near retirement or are voluntarily leaving the company. And although current family business leaders may say they are ready to hand the reins to other family members, ultimately giving up control and letting go can be a difficult transition. This is precisely why planning years in advance for eventual business succession is imperative.
– Transition planning is a process that can take years
In most cases, the best possible family business succession plan is one that can be implemented over the course of several years. When there is time for successors to learn their eventual roles well ahead of the actual transition, there is ample time for training and knowledge gathering. If possible, successors should spend time working in an environment other than within the family business for a period of at least a few years. An out-of-family-business professional experience can help teach accountability and responsibility and can help prepare the family business successors for the management role that will eventually be passed to them.
– Create a written succession plan with a timetable
It is not uncommon for family business successors not fully to understand the financial aspects of running a family business before being put in charge. Unfortunately, this can lead to disaster for a family business. This is just one reason that family business succession planning is so essential. It might mean that finance is given to a non-family member if no family member has the required skill set. The most successful family business succession will include a written plan with a timetable that marks when key events will happen and it also measures benchmarks. Also important is assigning a family member who will be responsible for making sure the business adheres to the plan.
Whilst this article may appear fairly comprehensive to a small family business, the underlying principles are applicable to all family businesses. Implementing sound principles has been shown time and again to increase the chances of the small family business growing into a larger successful long term business that survives to the third generation and beyond! Do ring me on 07841 215182 (and leave a message) or email me on david.eaton@smestrategies.co.uk if you like a complementary conversation about your family business.
David Eaton
APPENDIX
Example of a family business governance structure
Depending on the size of the business, a family business governance structure might have some of these roles in it:
- Advisory Board – an Advisory Board is an excellent tool for ensuring that ideas are evaluated by professionals who are able to think outside of the box. In most circumstances, the Advisory Board should consist of outsiders or people who are not affiliated with the family. Outsiders have the unique ability to review ideas, provide suggestions, and offer direction that may not be obvious to family members who are actually working within the business.
- Board of Directors – the Board of Directors approves the ideas and strategies of the family business leaders. The Board should consist of individuals with adequate knowledge of company operations as well as the ability to make informed and intelligent choices for the betterment of the company as a whole.
- Chairman of the Board – in most family businesses, the Chairman of the Board is both a family member and a shareholder.
- Chief Executive – in conjunction with the rest of the Board, the Chief Executive is responsible for the success of the business. This success is defined by having a business that meets corporate goals, performs to expectations and shows adequate return on investment.
- Finance Director – s/he oversees and manages the financial aspects of the family business. This role requires extensive financial expertise and background that includes accounting skills.
- The Family Business Council – it is a good idea for family businesses to hold regular meetings in which family members are informed about the current status of the business and any future business plans. The purpose of the Family Business Council is to make sure the family is fully informed about family business matters.