In doing estate planning, the business owner may only be concerned with who will inherit the business and how it will be transferred. Proper financial planning for the future of a family business must include consideration of two dimensions - the family’s desires and intentions for the business, and strategic planning for the business’s future.
Statistics suggest that a family business only has a one-in-three chance of reaching the second generation. Yet few business founders believe that their business will be the one to fail. The reasons so many family businesses do not survive have to do with the ways that family considerations can overwhelm business realities and their consequent lack of focus on the need for business renewal.
This dynamic arises from the unique quality of the family business - that people from different generations of the same family may share management and ownership in the business. Not every family member inherits ownership and not every family member works in the business. But those who do, or want to, often make their decisions based on personal rather than on business considerations.
The key challenge in planning for the family business is helping the family negotiate the boundary between the world of the family and the world of the business. If family members make agreements covering these areas, the possibility of destructive conflict is diminished. To achieve this, the family can use two overlapping, interrelated, but quite different planning teams.
The first is a council of family members, whose task is to deal with the business of the family, development of a new generation of family members, regulating the family members’ involvement in the business, and aligning the business with the family’s plans. The council expresses the will of the family in relation to its business.
But the family council alone cannot design the future of a strong family business. The planning process also must deal with business realities, helping the business develop and innovate along paths that are sometimes difficult for a family to allow. This is achieved by convening a proactive business board of directors that represents the needs of the business. Different elements of planning are carried out by the family council and the board.
The council contains members of the family, while the board contains the representatives of the family owners responsible for oversight and development of the business. While some family members may be members of both groups, each group has its own function.
RESPONSIBILITIES OF FAMILY COUNCIL
Planning is not a natural function for a family. Family members spend a lot of time bumping up against each other, and rather than plan, they try to find a fast way to restore family harmony. They develop habits of avoiding issues, denying problems, and keeping secrets from each other. If an issue is controversial or upsetting, families often learn not to talk about it, or to talk with everyone but the person in question. Even relatively functional families limit their communication with each other. This becomes a problem for business
planning.
Enter a financial planner who begins to ask controversial questions:
Who will run the business in the future?
Who will own it?
What are the expectations of financial participation for those who work in the business and those who do not?
How will decisions be made?
These questions produce difficulties because the family is not organized to answer these questions as a business. They tend to act as a family, dealing with each question as a single instance rather than anticipating them and making binding policies and decisions. But just getting together may challenge the family’s established communication and power structures.
For example, if a family is divided about which sibling should become the next CEO of the business, or does not want to talk about who is being paid what by the business, they will resist getting together for a discussion of the future. Some business owners will say, “This is my decision, and mine alone, so why should my children be involved?” As a planner, you might agree that this is so, but suggest that since there is so much potential for controversy, the family needs to get together to discuss plans, or to hear and react to plans formed by the founder. The financial planner or other business advisor will have to make the case to the family that they need to convene as a council to discuss these issues.
The family council must plan to secure the future of the family business in four areas:
Mission and values
Next generation development plan
Guidelines for family involvement
Ownership and transfer policies
BOARD OF DIRECTORS PLANS THE STRATEGIC BUSINESS FUTURE
The board of directors’ primary task is to look at the business independently from the family’s needs. This group has a different purpose, and usually a different composition, than the family council. The board typically includes the key business owner and may include family members who play key roles. But unlike the family council, it might also include key non-family executives and independent non-family directors or advisors.
The family council tells the family and the business how it wants people involved in the business, and what values, rules, and policies it wants to follow. But while the family is looking after itself and is not focused on business concerns, the board must help the family see what is possible, and how it can have what it wants. The family wants the business to be an engine for the family’s livelihood, and the board will often have to challenge the family, and even set some limits on pay, distribution, or family involvement. They also provide
the checks and balances so that family members do not go outside what is healthy or legal.
The board of directors focuses on four areas of strategic planning:
Business renewal
Capital needs - business and owners
Key employees - leadership team succession
Succession governance
CONCLUSION
A family that is several years from a generational transition should begin its planning process today, forming a family council and using its board of directors as an active force. The board cannot do its planning without having input from the family about its desires, values, and priorities. The process often continues over several years, with each group working on its own, but also having frequent communication and interaction. The family business is a complex system that only a multi-faceted method of planning will be able to help it move ahead.
Published in the April 2021 Edition of Farmer's Weekly
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