I’ve seen generational family businesses fail for lots of reasons, but there are almost always common threads
By David Harland CPA
More optimistically, I’ve seen lots of family businesses succeed to their third, fourth and fifth generations. Again, there are almost always common threads. The best advisers guide their clients away from potholes and into a smoother road to long-term success.
With that in mind, here are four questions every trusted adviser should be able to answer about their family business clients.
1. Does your family business client have a succession plan?
A family business needs a viable succession plan. The average Australian family business doesn’t make it past two generations, in large part because the average family business has an ineffective succession tradition. It’s a major obstacle and one too few trusted advisers take seriously enough.
Family-run businesses without serious succession plans have likely never had a robust conversation about how to construct one. The task could be simple, but it often isn’t. Every major party needs to be consulted and lots of considerations must be made, which can seem a daunting task for an already busy family group.
A good family advisor realises this is a journey, not an event. The first conversation (or even conversation about having a conversation) may not go over smoothly. The current leadership needs to be prepared for life after the succession. The new generation ideally has sufficient financial knowledge, prudence and entrepreneurial instincts to take over. Multiple heirs only complicate the process.
As a general rule, more complicated families should start their succession plans earlier and re-evaluate progress more frequently. Planning is time consuming and often uncomfortable. That doesn’t mean it’s too difficult to understand or can’t be done the right way.
2. Do they have family governance structures in place?
According to 2014 research by Ernst & Young, there is “compelling evidence that the largest and longest-lasting family businesses in the world became – and remain – successful by optimizing both family cohesion and profitable business growth.”
How do you optimize family cohesion and business growth? Formally, intentionally, directly and professionally. Create a family governance structure and stick to it.
Formal governance structures are less commonplace than family succession plans. For serious families, though, a governance structure can be an excellent governor on behavior and encourage good practices for a long period of time.
What does a family governance structure do? In effect, it creates a formal process and structure by which important decisions are made and important issues are discussed and resolved. The formal structure should address everything from succession talks to raising capital to avoiding conflict.
In the past I’ve identified three essential ingredients of family governance. These include ensuring each family member (or other key players) has a voice, that the family defines its missions and values, and that governance structures are viable and enforceable.
Many family businesses initially push back against the idea of a family governance structure. I’ve previously argued one way to make it more attractive is through a combination of hope and fear. Both arguments are clear: clients should hope to create a long-term legacy and hope to see their successors grow, innovate and thrive; clients might also fear sudden crises – whether a health or financial crisis – crippling their business because they lack a sufficient contingency plan.
3. Do they have an employment policy that employs the best people for the job?
Success creates its own problems, especially in family businesses. Consider the case of Cornelius Vanderbilt, a 19th-century railroad and shipping titan who, at his height, build a family business worth more than A$322 billion in today’s dollars. By 1970, no single heir was worth even A$1 million.
Between nepotism, favoritism, infighting, and a general sense of entitled privilege, the Vanderbilt family managed to squander one of the great family fortunes in history.
Today’s family businesses must ensure they’re employing the best people for the job, regardless of last name. This means professionalising the employment standards for family and non-family employees. As with succession and governance plans, employment standards need to be formal and explicit.
4. Are they engaging and embracing the benefits of the next generation?
It is a well-documented fact that family businesses benefit when they encourage children to first work outside before coming back to the family trade. A young adult can leave university and work for a neutral manager and for a business without his/her family name on the wall. This teaches the importance of self-reliance, accountability and merit-based achievement.
Often, they can return with new skills and outside ideas. Those can be seeds for future growth they wouldn’t have otherwise had.
Current non-family employees will also benefit, because they’ll know offspring have to earn their titles, just like anyone else.
David Harland CPA is managing director of FINH, an organisation that specialises in the provision of advice to family groups in business across the Asia-Pacific region.
The opinions expressed in this article are those of the author.