25 Best Practices

By Barbara Spector

Many families have found these approaches to be successful. If you make the necessary commitment, they're likely to work for you.

In our quarter-century of service to multigenerational businesses, we've observed one key fact about the families who own them: No two are alike. Each family has its own unique history, values, cast of characters, way of doing business and points of contention.

Yet although details of the problems and solutions will inevitably differ, several approaches to the challenges of mixing business and family have proved to be successful in a variety of family circumstances. Over the years, many professionals who study and advise entrepreneurial families have recommended these approaches. Most of them involve a lot of time and effort to implement. But if you're willing to make the investment, you may find they work for you.

1. Communicate openly and often. The best way to keep extended family members connected to the business is to keep them informed about important developments, including major company decisions, competitive challenges and important milestones. Invite family shareholders to attend celebratory company events, and introduce them as representatives of the family. Create a family intranet or newsletter and encourage all family members to contribute photos and news. Plan an annual gathering for the whole family, including social events as well as updates on the business and an educational component.

2. Start planning early. Procrastination leads to family strife and business confusion. Create a prenuptial agreement policy before anyone in the next generation gets engaged, and don't wait until your kids are in their 40s to think about your succession plan. The earlier you start thinking about the future of the company, the smoother the transition process will be. It's never too soon to begin mentoring the next generation in sound business stewardship and financial management practices. Even if none of your kids ends up as the business leader, you will have set them on solid footing for future roles as business owners or entrepreneurs.

3. Clarify and codify the family values. There are several advantages to taking the time to do this work as a family. First, coming together to develop a set of values that everyone can agree on (and commit to) is an opportunity for family members to get to know each other on a deeper level. Second, identifying what you stand for as a family is a powerful exercise. Third, having a list of values to consult can help employees and managers of the business make decisions as they go about their jobs.

4. Tell your family's story. Whether your family business is celebrating its 25th anniversary, its 150th or its third, there is value in retelling its history when family members get together. The founder's entrepreneurial spirit, persistence through adversity and strongly held beliefs offer important lessons for descendants. What decisions did previous generations make at key points in the company's history—and why? Make sure your employees and customers know your company's history and recognize that the family takes pride in its business.

5. Respect individuals' talents, preferences and sensitivities. It's OK if none of your children wants to work in the family business—and it doesn't mean the business will have to be sold. If your kids' passions lie elsewhere, they will not be happy and fulfilled working for the family company, and they might not be successful at it, either. On the other hand, next-generation members who are pursuing their dreams full-time outside the business can be very effective business owners and careful stewards of the family legacy. Consider keeping the business under family ownership with non-family professionals managing it.

6. Welcome independent, third-party opinions. Adding independent members to your board—experienced executives who have no connection to your family or your business—provides a strategic advantage that can mean the difference between success and failure in today's extremely competitive marketplace. Independent directors bring objectivity and perspective and ensure that the fiduciary duty to shareholders is paramount, which in turn builds cohesion among the family ownership group. Another source of objective advice is the family business consultant. If your family is mired in unproductive conflict, these professionals can help you get "unstuck." They can also help you create structures and processes designed to manage family disagreements and strengthen the business.

7. Take time for process and policymaking. It's no easy feat to drag multiple family members away from their busy work and home lives to debate the wording of a proposed plan or policy. But having these documents in place can help prevent or manage conflicts down the road. What's more, families who have worked together to create plans, policies and procedures say the process itself builds alignment and strengthens connections within the family.

8. Think beyond taxes; take a long-term view when setting up structures and policies. Too many family business owners design their estate plans with a single focus: to minimize the tax burden. They don't consider how the ownership structure or trust they create will affect the family or the business in the future. Ask your advisers to help you think through the long-term implications of any plans you are considering.

9. Create a family constitution and a shareholders' agreement. A family constitution documents the family's mission and values, defines strategic goals for the business, and identifies how the family will make decisions and resolve disputes. A shareholders' agreement defines buy/sell procedures, makes provisions for share valuations and identifies which types of share transfers are permitted and which are forbidden. (For example, restrictions on stock transfer can be imposed to keep ownership in the family.) A shareholders' agreement is a legally binding document; a family constitution is not, although signing a constitution implies a moral commitment to abide by its terms. These documents in tandem codify the family's relationship to the business and are important dispute-resolution tools.

10. Provide liquidity opportunities for shareholders. In later-generation family companies, disputes can arise when family owners who do not work in the business need liquidity but have no way to cash in their shares. All too often, these disputes escalate into lawsuits. Creating ways to unlock capital for these shareholders, such as a stock redemption program, will help keep your ownership group engaged and harmonious.

11. Listen to what the next generation has to say. Your next-generation members' perspectives on technology, current business-school theory and social networking can add value to your business. These young men and women can bring energy and innovation to family governance and business planning. Set aside your memories of changing their diapers and seek out their opinions.

12. Hire the best people for the job—and compensate them appropriately. The best person for the job—even the CEO's job—may be a non-family member. Installing relatives in jobs they're not qualified for erodes shareholder value and employees' respect. Many families have developed employment policies requiring several years of work outside the family business before a family member is eligible to join the company. This not only enhances the family member's experience and credibility, but also brings a valuable outside perspective into the business. Family employment policies also often include a clause stating that relatives can work in the business only if they are qualified to fill a legitimate open position. Compensation for all employees—family and non-family—should be fair market value. If your shareholders' agreement states that non-family executives cannot receive equity, consider implementing a phantom stock program to ensure alignment of top managers' interests with those of the family owners.

13. Respect the boundaries between ownership and management. Business owners establish the company's vision, mission and values and set goals for the return on investment they need, the amount of debt they will accept and the level of risk they will tolerate. Owners should not get involved in the day-to-day running of the business. Role confusion often occurs in family companies because family members can be owners, managers or both; many disputes arise because family members fail to recognize when they're crossing boundaries. Creating a family council can help family members to separate family from business issues and clarify the distinction between the business and ownership realms. The family council is the forum for addressing concerns and making decisions that involve the family and its relationship to the business.

14. Educate your family members. In order to be responsible stewards of the enterprise, family members need training in areas such as wealth management, conflict resolution strategies and basic business concepts. They also should know essential information about the family company—how it makes money, who its competitors are, etc.—and how to read and interpret financial reports. Training in family business best practices will help family members understand their roles and prepare them to tackle the challenges that lie ahead. Educated shareholders will function more effectively as an ownership group.

15. Have candid family discussions about wealth. It's never too early to begin discussing financial responsibility with your kids. Many parents have found it helpful to have kids split their allowance in three parts: some to save, some to spend and some to donate to charity. A good way to start a dialogue about wealth and values is to ask family members to define their concept of "having enough." Young adults should learn about investment risk and how inherited wealth can erode from spending and inflation.

16. Develop family members for participation in a variety of roles. There are many ways for a family member to contribute without working full-time for the company. Family enterprises need creative, enthusiastic and committed family directors, family council members, family foundation board members, family education program developers and family communications managers. Rather than pulling relatives into these high-impact roles through an informal call for volunteers, create a training program to ensure they are well versed in best practices and have honed their communication skills.

17. Welcome in-laws into the family. "Married-ins" bring new skills and experiences to your family. Let them know that you appreciate them. Include them in family meetings, and ask their opinions whenever appropriate. Recognize the importance of their support; they can help in rallying the family, but they can also fan the flames of sibling rivalry. Make sure they don't feel shunted aside while your family talks business, and understand their desire to join their own families rather than yours for holiday celebrations. Welcoming in-laws as full-fledged family members can uncover new sources of talent and valuable new perspectives.

18. Be on the lookout for changes in technology and in the marketplace, and encourage innovation. New products are being introduced and adopted more quickly than ever before. To cite just one example, decades passed between the invention of the telephone and its adoption by 50% of households, but cellphones achieved 50% penetration within just five years. Even the way that consumers pay for goods and services has changed (think PayPal), as well as the way items are brought into the home or office (coming soon: Amazon delivery drones). Throughout history, uncounted family businesses have failed because of successors' reluctance to tamper with the founder's product. Nowadays, your reassessment must extend beyond product offerings to the business model itself.

19. Focus on the family enterprise rather than the legacy business. As the field of family business research and advising has matured, there is growing recognition that there are many routes to family enterprise success. Some families sustain their original business for hundreds of years. Others sell the legacy company and use the proceeds to start a new operating business or family investment vehicle. And many families acquire and dispose of a variety of holdings over the generations. If signs point in the direction of selling the original business, don't be stopped by the "failure" fallacy.

20. Plan for retirement—and make sure you actually retire. There is a time to step back and make room for those who have higher energy and better knowledge of what's needed to compete in the future. Recognize that this time will come, and prepare for it. How will your retirement be funded? Devise a plan that does not drain capital from the business. And remember that a financial plan isn't all you need; you also must plan for rewarding ways to spend your time when you're no longer tethered to the office.

21. Schedule regular reviews of documents and structures. Your family governance documents may have become outdated if your family has changed because of life cycle events such as birth, marriage, adoption, divorce, disability or retirement. Business changes such as a leadership transition might also mean that some language should be tweaked. It's a good idea to reassess your governance documents—or, at least, some key parts of them—every three to five years. You should also review the composition of your board, family council and committees and consider whether it's time to refresh them with an influx of new blood.

22. Don't avoid conflict. Family members may hesitate to air their issues for fear of damaging relationships. But avoiding conflict while negative feelings simmer under the surface can do more harm in the long run. Families who have learned to manage conflict properly find that getting issues out in the open can bring constructive change. Many family business conflicts arise out of life cycle changes and thus are predictable. Family business advisers who have helped other families conquer these challenges can help facilitate discussions of sticky issues.

23. Encourage a "clan" rather than a "branch" mentality. In the third generation and beyond, it's important to encourage unity among the broader family—the clan—through gatherings of the entire family and communications systems that enable extended family members to get to know each other. A family that works on its connections will think of itself as a single, united "clan" rather than a collection of individual "branches." A "branch" mentality can lead to "us vs. them" thinking that can escalate into family feuds. An extreme example is the feud between Arthur T. Demoulas and his cousin, Arthur S. Demoulas, which crippled the New England-based Market Basket supermarket chain as the two branches vied for control of the company.

24. Work to prevent an entitlement attitude. Do your family members view the family wealth as a privilege and a legacy that they are responsible for preserving and passing on to their children, or do they think they are owed the chance to exploit it for their own personal benefit? Do they feel a duty to contribute to philanthropic causes? An entitlement attitude leads to ostentatious overspending and, in many tragic cases, to substance abuse. A stewardship attitude motivates family members to build and sustain the family wealth and serve the community.

25. Accept the inevitability of death. This advice seems obvious, especially when a family business is at stake, yet some business owners never get around to making a will. Consider Dhirubhai Ambani, who built Reliance Industries into India's largest conglomerate that was worth tens of billions of dollars when he died—intestate—in 2002. His sons Mukesh and Anil feuded for years afterward over the division of their father's empire. If you want to ensure your business runs smoothly after you're gone, a will isn't all you need. Advisers also recommend an emergency management transition plan that states who would take the reins if the business leader were to die before a family successor is ready to step up. They also suggest "fire drills" to test how the succession plan would be implemented. Giving the plan a test drive can uncover glitches and enable the plan's author to fine-tune details before it's too late.

Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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September/October 2014

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