Most family businesses are put up with long-term survival in mind. Usually but not always, parents who begin a business have in mind the eventual take-over by their children. Indeed, some parents look at the business as a family legacy or as a form of financial or career security for the next generations. However, this does not always happen. Studies show that most family businesses either close up or are sold before the second generation can take the helm.
There are, nevertheless, certain measures that will help business owners increase the chances their companies would survive into the next generation.
According to the Family Business Consulting Group, these steps may be categorized into philosophy, planning, people, and policy.
- Do we truly want to be in business together? Why?
- What role will the family play in the business?
- What is the mission of our business?
This involves, first and foremost, having a long-term vision for the business. A common understanding of that vision across the first and second generation will allow for a smoother transition when the time comes.
One area of planning that receives a lot of attention is leadership succession planning. This is definitely an important area. But ownership succession planning can be just as important. While some members of the family may desire to create a multi-generational family legacy, others may not want to be part of the business. Developing a funded buy-sell agreement that allows family members to sell stock back to the business or other family members is important.
Retirement/financial planning is also important. If the first generation does not amass enough assets to support retirement, the business may need to be sold. If the business has grown in value significantly, estate planning will be important as well.
Are the second-generation members of the family willing and able to continue the business? Do they have the commitment, business acumen, innovative spirit? A leadership development protocol ensures that the next generation can be effective managers and owners.
A sibling code of conduct articulates how 2nd generation members will treat each other and outlines a process for resolving conflicts, should they occur.
Whether or not family members choose to work in the business, they are often owners of the business. So, defining ownership rights and responsibilities is important as a family business moves to the 2nd generation.
Policies are guidelines that outline how challenges that may face the business will be addressed. The key is to develop these policies before the challenge is faced. Similar to planning, policies fall into both the family and the business arenas.
The most crucial business policy to develop before moving into the 2nd generation is the employment policy. This policy outlines the requirements to obtain a position with the company and defines how family employees will be treated versus non-family employees.
Equally critical is a compensation policy. This policy defines how family members will be paid for employment within the business as well as service to the family. It can also address how family business-related expenses are reimbursed.
A conflict of interest policy determines what to do if family members or their spouses have a potential conflict of interest with the business. For instance, what, if any, restrictions will be made on information shared with conflicted family members?
There is no one “correct” employment policy or leadership development protocol for a family business. The process of developing these policies is what is most important. Family members should discuss each of these areas until agreements are reached and documented.
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