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Keeping The Chaos of a Family Business to a Minimum

London Free Press

We have characterized the family business as dysfunctional, alone and heading for generation failure. We have said only 12 percent of family businesses survive to the third generation. A written succession plan in itself is not enough, and best practices documents combined with an outside board of directors and active family meetings help make the transition work more smoothly.

 

Let's take a closer look at how a best practices document, called the Participation Policy, outlines who works in the business and what hoops they need to jump through, how much they are paid, who they report to, and whether they need to have outside work experience or a college degree before they begin working in the family business.

 

Another best practice to outline is the Compensation Policy, which outlines who gets paid for what an on what basis. This would include an ownership policy to determine who gets stock and why they get stock. It helps clarify the compensation practices of the family business and the differences between common and preferred, voting and non-voting shares. It answers such questions as, what exactly does ownership mean in the family business? Does ownership mean control? Or does ownership imply stewardship?

 

Another great practice is to develop a document called a Sibling Code. This means that when the business enters the second generation – known as a sibling generation of ownership, which can last for several generations – we recommend the kids get together and strike a deal.

 

• What are the rules we are going to play by?
  
• How are we going to get along?
  
• What will we tell our spouses when we get home from a day's work?

 

Imagine two siblings working in the same business together in partnership with Dad, who goes away to Phoenix for nine months of the year and returns for three months. While he is away, the two siblings are often at odds on how to run the company, whether it's marketing or manufacturing.

 

When they go home, they complain to their spouses about the other in the same way they used to go to their parents and complain when they were younger.

 

One sibling comes home from work and tells his wife about all the ridiculous things his brother has done to the company, and over time starts to develop a negative opinion about the business. The sibling feels better after unloading and sleeps well that night. However, his wife lays awake all night wondering why her brother-in-law is brain dead.

 

At Thanksgiving dinner, the two siblings' spouses look at each other with great pity. They send subliminal messages to the children, who are supposedly heirs in the business. The message to the children is, "Don't go into the family business. Go be a doctor or a lawyer".

But the Sibling Code allows the adult children to present to the outside world, including their spouses, how the business is to be perceived. The Sibling Code simply lays out what they agree they will say to their spouses at the end of the day.

 

Another best practices document is to create a mentor for Junior outside of the business, other than Dad or Mom. Junior should work outside of the family business for three to five years, minimum, before getting involved. This will help prepare him or her for the incredible pressures of second-generation ownership.

 

You see, the biggest problem the next generation faces is the scrutiny they live under. They are faced with the expectations of employees, customers, suppliers and advisors. Heirs live under tremendous pressure because they have to be Part II of what the founder was. It creates an impossible expectation.

 

The challenges facing second-generation ownership are tremendous. Heirs have a hard time just finding someone to talk to and trust because no one trusts them. Everyone thinks they were born with a silver spoon in their mouth and come from the deep end of the gene pool.

In addition to a best practices document, a trusted advisor can also improve the success rate of the family business. For example, what do the founders of the business worry about most? If the financial security of the founder is not absolutely guaranteed, the founder will either never leave or will leave and come back. A trusted advisor can help to inform children and parents about the issues of financial security and liquidity in the business, and keep the communication lines open.

 

These are critical issues that, if solved openly by family members, can help keep the business thriving well into the future.