Develop your multi-generational business scope
Keeping the family business thriving across generations is a dream come true. From small local businesses to large international companies, there are some challenges that all growing businesses face. For business owners hoping to extend and maintain family control over their organizations over multiple generations, there are additional unique business planning issues that must be successfully managed.
In multigenerational family businesses, complexities are compounded by typical conflicting opinions about issues that run the gamut of business and family concerns, such as succession of power, disposition of assets, and perceptions of patronage, to name a few. Below is basic financial planning information and business advice for family business owners who plan to expand their business with the hope of keeping it in the family for generations to come.
Foundational financial planning for family businesses
One of the great operational benefits of running your own family business is that you are not required to satisfy the short-term interests of the general shareholders. This independence puts family-owned businesses in strategizing toward greater long-term financial performance. This is, of course, only if the risks are carefully assessed. But, in general, the freedom to focus on the long view gives the company the greatest likelihood of withstanding external influences over time, such as industry changes, a larger economic downturn, natural disasters, or any of myriad local or broader crises.
- Successful leaders in family businesses tend to focus more on the goals of the next generation than on the goals of the next quarter, according to the Center for Family Business.
- Family business managers who focus on the long term tend to choose business strategies that prioritize the interests of customers and employees.
- Family business leaders who think long-term tend to promote social responsibility.
Of course, owning and operating any business is a financially risky undertaking. Market uncertainty, budget errors in income projections and expense assumptions, and unanticipated effects on long-term investments are just some of the areas of activity in which the long-term interests of family businesses are exposed to ongoing risks.
Turning a profit in a given quarter or year is just one requirement in a wide range of business security requirements. Proper financial planning is essential to maximizing the family business’s potential for future years of growth and stable operations, and to help the business avoid traps that threaten businesses and the interests of their owners in cases of inadequate strategies to financially protect the family business.
Generational Business continuity
Effective strategic vision in business planning for multi-generational family businesses is the driver of growth and core performance. Each generation of management’s personal performance in this area of management is the most important, and sometimes underappreciated, system of business. The foundational elements of family business management planning include:
Formally agreed ownership interest structure
- Define administrative control and operational control
- Plans to compensate family members who are active in the company and who are not
- Family Employment Policies
Administrative succession planning
Establishing a business ownership structure, i.e. determining who owns the majority of the shares, and what those shares look like – directly, as an LLC, or in a trust – determining the appropriate blocks of ownership and voting rights are central points in planning, as it relates to the various interests of family members . The best practices for structuring the shares of a particular family branch are seen through patterns that accommodate as closely as possible the practical interests of the members in that branch.
Administer family affair in business
Voting on transactions, such as mergers and acquisitions, sales and agreements to distribute dividends and other compensation to family members, are all serious issues.
Compensation – Each family shareholder expects his or her share of the proceeds from sales and cash dividends. Best practice includes setting salaries and other compensation in line with those evaluated for similar jobs at similar companies.
Family Employment Policies Establishing employment policies as part of business planning can help avoid the company’s financial implications. The policy should include guidelines for determining whether business and family interests would benefit from employing a particular family member. Only family members who can perform well should be employed in the company. Others should be advised to look for other types of work. Best practice is to enable a structured process, by establishing criteria for the employment of family members, such as adequate:
- Personal motivation to be in the industry
- Education and/or external training
- Company capacity and the need to reasonably support recruitment
Fair and clear evaluations – including a clear job description, skills and performance appraisal process to establish an accountable, if not always conflict-free, family employment system. While some family members are suitable for leadership, not everyone will rise to the top management. But upbringing in the family tends to make the members aware of how things are to work, so that there is usually a reasonably low risk of excessive expectations in this respect.
Third Party Solutions – The family office or other third party solution can sponsor change and maintain tradition in family business operations. Young members can pursue mentorship and work in various departments and roles in the company, to develop an understanding of the business. More experienced family members can lead teaching opportunities (such as family retreats, company and/or other social business activities) to advance the founders’ central principles.
Family functional in leading business
Successful family businesses are often strengthened by the sheer determination of the family members who run them. As the business matures, and its founders become experienced entrepreneurs, more opportunities and challenges are presented.
Second and Third Generation – Attrition during the transition from the foundational generation to the next generation of a family tends to rise. It is usually higher during the transition from the second generation to the third generation of family management.
Capital expansion and merger – If a company has grown in terms of profitability or market share to such an extent that capital expansion is the next business objective, it may be time to consider a merger with a larger company.
Family Business Conflicts – Research indicates that declines in business performance are common as more family members work in a business. This can be attributed to:
- Some family members obstructing the business financially.
- Appointments that harm efficiency and productivity.
- Lack of training, skills, or maturity.
- Incompetence of younger members of the family, causing senior members and/or employees to lose confidence in the company’s potential for continued profitability.
The introduction of new generations of family members into the ranks of the employees can lead to far greater risks to the company than any outside employment issue. The risk of poor employment of a family member can severely damage the cohesion of the family. Managing to prevent bad hiring is itself a sensitive issue for family business owners, and one that can negatively impact long-term family relationships. Family trust can be broken. An emotionally charged work environment can jeopardize the future of a business.
In family businesses that succeed through multi-generational ownership, a certain continuity of the business management system is strictly maintained by the upper generations, so that practical rules and nurturing of the family’s common values are effective for maintaining order.
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