Will Your Legacy Withstand the Test of Time? Here’s the Formula.

What makes a family business so successful? How is it that some family run businesses, over the years, prove to withstand the test of time, while others fail generational transition? A successful family business is a marriage of the family dynamic with economics. This marriage creates a number of challenges, but if effectively managed, fosters an environment for a sustainable and pro table business over generations. This article harmonizes the conceptual processes of succession planning with the practicalities of its implementation.

Families are more likely to withstand these challenges through the development of policies and procedures that tailor to their business and personalities. No two families are the same and therefore no two succession plans will be identical. However, several common denominators will be recognized amongst those family businesses which successfully traverse the generational plane which are as follows: namely,

(1) Governance and Liability Protection;

(2) Economic Responsibility;

(3) Effective Use of Human Resources; and

(4) Adaptation and Encouragement.

1. Governance and Liability Protection

Step one of producing a well-grounded business plan is the formation of a business entity providing limited liability protection to its owners, such as an LLC or Corporation. The shareholders are the owners and the stakeholders consist of all involved in the company, whether or not an owner. Governance, at its core, is a function of the board of directors, and in many cases is a hybrid function of both owners and management. The current and succeeding generations should actively communicate about the future of the company, and how that plan will be practically implemented.

The complexities inherent with the mixing of family members and the necessary productivity to sustain a successful business must be addressed. Given the challenges in following the traditional corporate norms of board meetings, shareholder meetings, and the upkeep of a corporate book, many times they are left ignored. Inevitably, the need to comply must be addressed head-on, whether it be retirement, the uprise of the succeeding generation, qualifying for a loan, or buyout of an existing member. Annual board meetings help identify the responsibilities of each family member,  and help make way for those eager to tackle the business challenges ahead.

2. Economic Responsibility

A cause for concern is how the succeeding generation will manage the family business, and the financial success that inherently is tied to it. A family enterprise is a shared family economy, in which members rely on each other for successful and equitable management of finances. A sound succession plan integrates those fundamental layers, namely, its finances, family, and its reputation. Communication between the generations regarding financial responsibilities (of the company and its owners) can transform the younger generation from family “employees” to stakeholders actively involved in the productivity and profitability of the business. A family which holds future productivity as a priority holds the key to its success. The succession of the economic realities of a company are a driving force behind a company’s longevity. These economic realities include family salaries, business expenditures, the growth and breadth of its assets, investment, individual ownership and control. Families which address these issues head on typically succeed in the economic responsibility component of a succession plan.

3. Effective Use of Human Resources

The integration of family members within the business according to their capabilities play a direct role in the success of a company. This is what makes a family business so special. Effective use of the people within the family business is an investment in and of itself and ultimately proves crucial to a successful legacy. Each family member brings their unique attributes to the table which include, levels of education, experience, intellect, personality, financial awareness, and management capabilities which must seamlessly integrate in order for the family to work as a unit and prosper. Management must be able to successfully identify these specific attributes and incorporate them into the family business structure all while being profoundly aware of the politics and hierarchy of the family. The balancing of this family dynamic is a job which must be addressed and readdressed in perpetuity. A well-thought out analysis of these factors is critical to the preservation of the elder generation’s legacy.

4. Adaptation and Encouragement

The balancing of family with business along with its goals of continuity require the integration of love and affection with the necessity for company survival. It demands recognizing one’s own mortality and a shifting of focus to the next generation. Those who fail to come to terms with this reality lose sight of their legacy. Self-awareness of one’s position in the generational chain helps facilitate continuity. This redirection of focus encourages the next generation to succeed, and formulates a foundation for sound succession planning. Family businesses which have invested the time to foster a cohesive continuity plan, ultimately prepare themselves well in advance of actual succession in order to prepare for unexpected or unanticipated succession shift (i.e., death, disability). Encouraging the younger generation to take the reins and embrace ownership over the business under well-structured policies enables it to stay the course and demonstrates a family’s commitment to its legacy and not any one individual.

To complicate matters, often family assets are interwoven, personal and business. Attention to one’s personal estate planning is as important as a succession plan for a business. The relationships between siblings are also critical. Some siblings inevitably become employed or obtain ownership in the family business, while others may choose a different career path. A fair distribution of personal and business assets plays a vital role in business, family, and sibling harmony.

Each family, at one time or another, is inevitably going to be faced with its unique set of challenges. Seeking the guidance and advice of professional advisors fosters healthy communications between family members and ensures that existing challenges are identified and addressed head on.

This article and all articles in this newsletter are not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances.

 

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