WHAT'S IN THE BEST INTEREST OF THE FAMILY AND THE BUSINESS?
Updated: Apr 28, 2021
The concept of a Family Council may at first appear to be remote, however as the family business professionalises it should become more familiar to the family members and a key structure in its culture and modus operandi. Not all family businesses understand the importance of a Family Council, and therefore they neglect to develop one. Time is required for the family to develop openness and to share 'sensitive' personal information. If your family business requires guidance and direction with conflict resolution, having a Family Council might be an excellent solution.
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.
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?”
The family council must plan to secure the future of their family enterprises in four areas:
Mission and values
Next generation development plan
Guidelines for family involvement
Ownership and transfer policies
MISSION & VALUES
Planning is based on assumptions, and many family business owners make ones that may not be correct. For example, if a family has a thriving business, they assume that their children want it to continue, and to be partners in its ownership and management. But some family members may want other things—they may want to create their own businesses or other careers, and they may want the family’s money to support them moving in these directions.
So before deciding the fate of the business, the family has to define its own goals for each individual, and as a whole. Where does the business fit in? For what does the business stand? These questions are broader than just the business direction. The family must look at its own values—about generating wealth, spending or saving it, and how it wants to be remembered in the community.
The family council can explore the values and intentions of their older generation and the talents and desires of the younger one. This may lead to conversations about values, money, and desires for the future. This life planning precedes discussion of the business future, because if the family members understand one other and each has agreed on their shared values for the business, then they have a framework for deciding how the business should run.
NEXT GENERATION DEVELOPMENT PLAN
When you ask clients what they want from their wealth, most often they state that they want their children to have a good life. They are concerned that their children will not find a focus for their lives, or that they will live only to spend the family wealth. Parents want them to live useful, worthwhile, and fulfilling lives. To achieve this, each young person can be asked to write a personal development plan. If necessary, they might consult a career coach or counsellor. While this may not decide the future, it raises questions and brings data into the equation that may take them beyond obvious choices.
When the family has a business, working there often becomes the path the children want, or feel compelled to choose. Entry into the business is too often an unconscious choice, made for the wrong reasons—obligation or because it is easy. Some members of the next generation do not think beyond it. They enter without outside work experience, and soon they feel (or actually become) unsuited for work anywhere else. They are trapped, and the business is trapped with them.
A family, while planning its future, should ask its heirs to think about what they want to do with their lives, with the business as a choice they make only if it is appropriate. Each family member should have the challenge and opportunity to develop their skills. As part of planning for the future, the family should consider how it supports the job and career choices of family members. It may encourage them to think beyond the family’s business, which can be like never leaving home.
Not only does the younger generation need a development plan, but the elder, the business founder, also needs to look at his or her personal development in terms of what the founder wants to do with his or her life apart from the business. When the founder has a personal development plan, it is easier for them to make the tough decision to disengage from the business and let go. Unless they find someplace meaningful to go, they will be back.
GUIDELINES FOR FAMILY INVOLVEMENT
Is the family for the business or the business for the family? The family must decide how it will treat family members who want to work in the business. They need to set rules for entry—what a family member has to do to get a job. They need to define how compensation is determined, how performance is evaluated, and what perks are available to family members. Do all employees get cars or credit cards, or are these benefits only for family employees? Do all family members get cars as gifts? Or a house? The family that wants to give gifts to each other has to learn the difference between doing it as a business matter versus as a personal matter. If there are no guidelines or rules for these areas, conflict is inevitable.
The council sets clear expectations for entry to the business, to reinforce that working there is not a right, or a form of family welfare, but a privilege for someone who is accountable to the family for results. This is a business value that must be introduced to family members before they develop a contrary sense of entitlement.
As a family grows and its business develops, it must become more explicit about these matters. Most families develop rules that set job qualifications for work and move toward paying market rates for employment. But at the early stages of the business, when the business really is an extension of family, it may develop the habit of using the business as a family perk. Once a family is used to having certain privileges, it is hard to remove them without those affected feeling it is “unfair.” Strategic development means that a family desiring to grow its business across generations should develop a family charter or constitution that states the rules and expectations in these areas. Strategic planning includes a plan for how family involvement will unfold.
OWNERSHIP & TRANSFER POLICIES
As a family grows, its members/owners may need income from the business, and the business may need capital for development. What are the guidelines for family member distributions versus retaining earnings? There are families who harm the long-term development of a venture because more and more family members feel entitled to a certain level of income.
Many family business founders want nothing more than for their businesses to remain in the family. But the degree of ownership, and how the inheritance will be determined is a matter of some consequence to the heirs. Will they each inherit an equal share, or will the family members in management inherit more? What is the rationale for the difference? Who controls the business, and what are the rights of minority family owners? Will family members inheriting less ownership receive any other assets? Can a family heir who has ownership sell his or her share to another family member or to a non-family member? How does that happen?
Each of these questions deeply affects the future of the business. One of the most important areas for planning is the priority assigned to each family member in terms of management and ownership. While many families say they need to keep their options open, the family should consider which direction they are more likely to go. They must ask about the financial needs of the next generation, and how the business will provide for them. Many a family business that provided a good income for one or two families is not designed to provide the same lifestyle for a half-dozen.
The greatest challenge facing the family council arises when it tries to decide whether to let go of control or ownership of the family business. At some time, a business will stop growing and the family will have to ask itself whether it should diversify into other areas to provide greater opportunity to family members or grow wealth more quickly. But the family may feel obligated not to sell, and therefore hold on too long. This decision rightfully belongs to both the council and the board of directors, each of which have important perspectives on the choice.
Family Legacies www.family-legacies.com is a multidisciplinary family business consulting company. Our consultants are leaders in their respective fields including; Family Business Consulting, Strategic Planning, Financial Planning, Wealth & Risk Management, Corporate Finance, Business Transitions & Exit Planning - Buy, Improve, Grow & Sell Businesses, Commercial & Family Law, Executive Coaching, Leadership Development & Facilitation, providing our clients with a professional and integrated multi-disciplinary service.