Family businesses, at 57% of 2019 US GDP, occupy a central role in our economy, and the number of jobs such firms create is even higher, at about 80%. For many people, owning a business is a dream. Family businesses give owners the opportunity to build companies their way and with their values while creating wealth for future generations and changing the world. However, family businesses can be complex. Grudges formed during childhood can appear in the boardroom, and even the most evolved adults can be instantly returned to their twelve-year-old self in the presence of kin – even at work.
As a member of the Board of Directors at Sabre Yachts, my family’s business, I personally share and understand many of the joys and challenges these dynamics create. I also have the pleasure of coaching several family business owners and executives. Over the years, I’ve learned a few secrets to success that can last generations. If you run a family business, answering these five questions is critical.
- Do we have the correct governance structure? Like a good insurance policy, governance is easy to ignore until you need it. A strong board of directors, chosen with intention to fulfill shareholder goals for a business, is imperative in creating CEO accountability and avoiding power concentration. This concept appears simple but is often complicated for family businesses to execute. Does being a family member or significant shareholder entitle a person to a board seat? Do you have professional, independent directors? Who has voting rights and effective control? Are there trusts or other ownership vehicles that could impact voting with generational transitions? Effective governance structures should provide a blueprint that answers these questions.
- Are management roles clearly defined? A well-run business is a wonderful asset for a family to enjoy, but a poorly-run business can easily become a nightmare. Consider the CEO. Whether she is from the family or is an “outsider” may make a difference in the composition of her management team. With a team of family members, management roles may become muddied. As with any business, develop straightforward, professional, and consistent evaluation and compensation systems for the team.
- Does my family relate to the business appropriately? The first two questions are relevant to all businesses, although answers to both generally bear strong imprints of families in business together. The unique dynamics of family-owned businesses truly emerge when we consider the lens of how members relate to the company. From a governance standpoint, family representation on the board requires clear policy. If family serves in management, outlining criteria for those roles is vital. Decide if family member performance is measured differently than other employees.
Before family members work at the company, it’s helpful to have a policy regarding whether previous, outside experience is required before joining the business.
To promote healthy familial relationships while maintaining a strong business, determine where and when is appropriate to talk about the organization. It’s easy for conversations to spill from the boardroom to the Thanksgiving table, and vice versa. Many successful family businesses schedule annual retreats with all generations to discuss questions of governance and strategy as well as family legacy, culture and philanthropy.
- Do we have a succession plan? Succession plans are dynamic, complex and driven by a myriad of factors, including external business conditions, differing family member needs for a liquidity event, and the appetite of younger generations to continue in the company. Succession planning can be tricky because without proactivity, it can quickly become time-sensitive. Many families make the mistake of delaying these discussions until the illness or passing of a family member. This can increase trauma and create chaos in business operations or ownership. Mitigate pain down the road and start succession planning before it’s needed. Revisit it often with the openness to adapt to new circumstances.
- Do we have the right advisors? Most families in business don’t venture alone and are in no shortage of would-be advisors proposing their services. From a professional standpoint, certain advisors have obvious roles: bankers, lawyers, consultants, etc. On the family side, some key advisors to consider are trust and estate attorneys, independent trustees, financial advisors and family coaches. Identifying the right advisors can be tricky, especially at the beginning of a relationship. For this reason, word-of-mouth and referrals are one the most effective ways to find advisors. Ideally, the right team will collaborate to help your family clarify and achieve its goals.
If you are an owner of a family business, lucky you. And also, good luck. Family businesses are not always easy, but spending time and seeking good advice to answer these five key questions will yield dividends for many generations.