Pitfalls of a ‘liquidity event’
Often after a family sells its business, family members encounter some unwelcome side effects. Unless they anticipate and avoid the pitfalls of a sudden "liquidity event," family ties can fray.
One of the first and most pivotal issues to be dealt with is the extent to which the new wealth can and should impact the family's lifestyle. It's also essential to consider how spending today may affect the long-term sustainability of the wealth.
Parents should explain the extent to which the newfound wealth will affect the family's lifestyle, and ways it will not. It's also helpful to emphasize any plans to use some of the money to help less fortunate people, and for parents to discuss their feelings about setting aside money so there will be funds left over for future generations.
Trust: An essential family value
One of the challenges enterprising families face is how to build or rebuild trust in the family system, the business system or both systems.
In order for the systems to function well, each set of stakeholders with potentially competing interests must maintain an appropriate balance over time. In the family system, this balance is frequently maintained by a strong matriarch or patriarch. As families grow in numbers and branches, family governance structures, such as family constitutions and family councils, are developed to help maintain balance. In the business system, formal governance structures perform the balancing function. In each instance, the optimal operation of the balance/governance function requires that the stakeholders trust in the fairness of the balancing function over time.
Enterprising families may enhance the level of trust in their systems by:
- Identifying values and vision statements that clearly state the family's priorities.
- Creating transparent governance structures and processes that include clear protocols for decision making, consequences for unacceptable behavior and gauges for measuring the success of projects, goals and action plans.
"Trust in family enterprises," by Michael T. and Bonnie B. Hartley
Signs that succession is going well
In my travels around the family business succession landscape, I have come to recognize four landmarks that indicate a succession plan going well.
- Integrity is generally considered the most essential successor attribute. Successors must be committed to the well-being of the business and all its shareholders, not just what's best for them personally.
- Innovation means a recognition that the business will not be sustainable if the successor runs it exactly the way Dad did. The company will have to be reinvented as market conditions, technology and society itself are continually transformed.
- Competence must override primogeniture. Businesses that survive and grow are those that choose the most competent leadership available, whether from within the family or beyond it.
- Collaboration is required as soon as more than one family member is hired or owns stock. Will other family participants feel sufficiently included to wholeheartedly support new business initiatives?
How to jump-start growth
The aftershocks of the recent financial crisis likely will continue to reverberate throughout the economy for years to come. To ensure your company's future survival, you must open yourself up to new ways of thinking about growth. Here are some strategies for jump-starting sustainable, profitable growth:
- Invest in depth, not breadth. Focus on deepening your company's core competencies rather than making capital investments to tap new markets or capture market share.
- Become more agile. The companies that will survive are not the largest, but those with a lean cost structure and flexible working capital that can adapt rapidly to changing economic conditions.
- Help to keep your customers and suppliers profitable. Take steps to integrate more closely with your supply chain, such as by helping your customers market to their customers. At the other end of the supply chain, brainstorm with your suppliers about how they can work with you to increase sales to your customers.
- Develop and maintain global brands. Use slogans that transcend cultures and are identified with your company or your products.
- Seek out long-term capital sources. Family businesses have a significant financing advantage: patient capital from the family. But this patient capital must be nurtured. Shareholder communication is essential. A survey to determine individual shareholders' needs and objectives may lead to the decision to invite a long-term capital partner to provide diversification for the family or growth capital for the business.
Think positive in your family business
Here are some tools and approaches suggested by positive psychology that can help family businesses improve the likelihood of finding sustainable happiness and success.
- Allocate more time and resources to study your successes. Recognizing what helped create your successes (instead of focusing on fixing the problems in your organization) may improve the chances that those successes can be replicated from generation to generation.
- Conduct talent assessments, which measure an individual's competencies, to help ensure that people are working in the roles and capacities that are most likely to result in personal satisfaction as well as maximum contribution to the organization.
- Use databases on leadership skills to help identify qualified successors.
- Conduct emotional intelligence assessments to measure an individual's interpersonal skills, also an important factor in identifying a successor.
- Identify your great communicators via communication assessments. Individuals who recognize the importance of listening to others often are great leaders.
- Harness the power of appreciation. For example, begin family meetings by asking participants to share something that they appreciate about being a member of the family.
From "Accentuate the positive," by Scott E. Friedman and Dan Baker, Family Business, Summer 2010
Interviewing non-family candidates for top jobs
Family business owners are often so accustomed to selling their organization that they forget to discuss the details of how a prospective employee would work with them. Part of the problem is that family business owners are often reluctant to admit to internal strife and challenges. Effective communication can help prevent future disappointment.
In drafting a job description, think carefully about how much control you want to give up in your organization and what decisions your non-family employee will make.
Business owners can be easily charmed by an executive's résumé that boasts of experience from Fortune 500 companies. Smart business leaders spend time with promising job applicants in informal settings, such as at a restaurant. Eventually, the candidate's true personality will emerge.
Determine your compensation philosophy
You have a compensation policy, even if it isn't in writing. If you are not sure what it is, just ask around. If you don't have written compensation guidelines, your employees will say the policy is "management discretion," or something similar. While that is, in fact, a policy, you may want to draft something more specific.
Start with a compensation philosophy. How does your company compare with the industry standard? Is your compensation policy based on individual performance, of is it a team effort reward system? Do you reward goal achievement? Do you promote from within to increase compensation potential? Is your fringe benefit package optimal or minimal? How are profits shared, if at all?
Draft a few paragraphs that state your company's compensation philosophy. This will make the rest of the task easier.
From "A better way to pay," by Richard M. Segal, Family Business, Summer 2010
Negotiating a loan
How can you protect yourself if your lender insists that you personally guarantee a loan?
- Get your accountant in on the act. Your accountant can help you through the often-arduous application process and assist in negotiating the terms of the loan.
- Provide collateral. The more collateral your business can offer and the more liquid those assets are, the less important personal guarantees may be.
- Do your own due diligence. Ask your advisers, colleagues in your community, vendors or customers if they can offer insights on the reputations of the banks you're planning to approach. Also make sure the bank is financially stable.
- Refrain from withdrawing assets from your company for at least a year before applying for a loan. That will lower your debt-to-equity ratio and strengthen your position.
From "Commitment guaranteed," by Jayne A. Pearl, Family Business, Summer 2010
Foster your family culture
The family culture should be stewarded and shaped every bit as much as the business culture. As families grow across the generations, numbers grow through birth, adoption and marriage. The range of interests and histories broadens. Yet it is possible to find shared interests among all, or most, family members and to invest in them.
Entrepreneurial stewardship encourages each individual to flourish, and it devalues a sense of entitlement. It's also a mindset for letting go, enabling children and grandchildren to spread their wings. And it creates the foundation for enticing them back to share their talents with the people who cherish them most.
From “Managing paradox,” by Stuart E. Lucas and David Lansky, Family Business, Spring 2010
When to prune your family tree
Is it time to curtail the complexity of your family business ownership structure by reducing the number of family shareholders? It may be time to consider such a move:
- If you see family members who are not interested or are incompetent.
- If you have very capable and highly motivated non-family employees.
- If family members are competing to become successors and future conflict is a real possibility.
- If owners' visions diverge.
- If your board includes family members who are involved in the business but are not playing a key role.
- If inactive owners feel they're uninformed or taken advantage of, or if they believe active owners are overpaying themselves or non-family members.
- If family members' life cycles don't match up.
From “Should you prune your family tree?,” by Jayne A. Pearl, Family Business, Spring 2010
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Pitfalls of a ‘liquidity event’
Trust: An essential family value
Signs that succession is going well
Think positive in your family business
Interviewing non-family candidates for top jobs
Determine your compensation philosophy
When to prune your family tree