Sunday, August 9, 2020
Helping Family Businesses succeed.

Four Tips on Making a Family Business Survive — and Thrive

Eric Gundlach

Family businesses face unique challenges and have unique opportunities.

Consider that less than 30 percent of family businesses survive into the third generation of ownership, yet those that achieve this milestone outperform their non-family owned peers. Simply put, the family relationships that can enhance commitment to an enterprise and contribute drive to the mission can also get in the way of sound business practices.

Some of the most respected global companies are family owned – BMW, Samsung and Wal-Mart to name a few, along with one-third of all the companies in the S&P 500 Index. Among the more than 42,000 businesses in Baltimore are many well-regarded successful family enterprises. Some of these are clients of mine whose sources of satisfaction and frustration with their businesses often come back to family relationships.

The family aspect of the business is like a multiplier effect. When family relations are harmonious and business is going well, the shared sense of accomplishment is profound. When problems arise, these too are amplified by the complexities of the family.

Even though family businesses span all industry groups and range in size from sole proprietorships to global giants, the successful ones share some key attributes, just as those that fail do. Four characteristics separate the winners and losers.

Strong business governance is a key to success. Many family businesses have boards of directors made up of only, or a majority of, family members. Some family businesses ensure more balanced boards of directors through policies limiting the number of family directors, or compliment their family board members with non-equity holding directors. If the governance structure doesn’t allow for outsiders on the board, setting up an advisory committee to the CEO made up of outsiders with fresh perspectives and expertise can help offset this limitation.

One of the most common reasons family businesses fail is that they fall into the trap of “management by inheritance, not competence.” Confronting family members with shortcomings is tricky business, and family members in executive positions often avoid these conversations, or have them but have differing assessments of family members’ capabilities.

Polices that enhance meritocracy can help by setting parameters. For example, some companies require family members to get experience outside of the family business before working for the enterprise, and also require that any family member appointed to a management position has to meet the same criteria for the job as an outsider would. Having outside directors or advisers involved in the process can enhance objectivity in selection decisions.

Infighting over succession is a particular problem best addressed by professional management practices, including the application of selection criteria that would be used by an executive search consultant. A simple test when confronted with performance issues caused by family members is to ask yourself, “What would I do if this person was not related to me?”

A third attribute shared by successful family businesses is that they have well defined processes for balancing the capital needs of the business with the family’s cash needs. Ownership decisions are governed by long-term shareholder agreements that stipulate how shares can and cannot be traded. Many successful companies have “ladders” of relationships built into their buy-sell agreements that give siblings right of first refusal, followed by first cousins, and then others. Occasional “liquidity events” can satisfy the needs of one generation transferring out of the business while passing ownership to the next generation.

Finally, family companies that have long-term survival rates do a good job of insulating business decisions from personal financial issues through professional wealth management. In the case of families with substantial wealth this often takes the form of a family office, but less wealthy families can benefit from professional management of assets outside of the business through a wealth management firm.

Because family owners most often have a substantial portion of their wealth tied up in their business, they need to check their own tendency for risk aversion when making business decisions and have personal financial plans to compliment their business plans.

A little attention to good governance, a focus on merit, using objective outsiders and having structures to meet family financial needs apart from the capital needs of the business can go a long way to ensure that your family business ends up in the survivors’ column.


| Terms Of Use | Privacy Statement
Copyright 2020. Broadway Bank. Content is not a substitute for legal and tax advice