How to Help Your Family Business Survive the Generations
February 25th, 2010The transition of family businesses through the generations is achievable with good governance – a famous example being the Houshi Onsen, a hotel and spa business based in Japan, which was founded in 718 and is currently in its 46th generation of management!
Being specialist Family Business Advisers we took particular interest in a recent article by Century Wealth Management from the US which deals with Family Governance issues. Historically, it quotes, 65% of family-owned businesses fail to survive to the second generation and 85% fail to survive to the third (no statistics available for 46 generations!). This is an ominous statistic for those attempting to establish a business which will become a family legacy. They suggest that the best way to avoid becoming one of these statistics is for family owned businesses to implement these 7 steps, governance related, to manage this business risk.
1. Embrace the Intangibles-
“A family business is the embodiment of a family’s values and culture. These are the intangibles that make a family business unique.” They suggest talk, talk and talk some more until you have defined the family mission statement and a history of the company for all stake holders in future years.
2. Split Personalities-
“In most businesses the roles – owners, directors, employees – are clearly defined. Not so in the family-owned business, where these roles are blurred and board meetings take place nightly” . When we talk to our clients this is a very common scenario. This definition and separation of roles is an important and progressive step for a family business to take.
3. Consider a Board
“A board can direct strategy, major decision making, hiring and compensation of top managers, taking these potentially emotionally charged decisions and creating a framework to deal with them fairly and rationally”. This can occur when your business has reached a reasonable size and family members can be involved in the business decision-making at this level.
4. Earn Your Voice
“It is important to separate membership in the family, a birthright, with involvement in the family business, which needs to be earned”. There are many known examples of how Australian family owned businesses manage this process: some state you must work out of the family business for a prescribed period of time before you can work in the family business, other state the family members must reach management level outside prior to coming back in. Each family business differs and the decision is unique to each circumstance but a level playing field is the outcome.
5. Solve Problems before they Happen
“Policies are the rails on which your increasingly efficient family business needs to run… in the emotionally volatile environment of a family business, problems must be solved before they occur, and the rules of the game must be clearly defined” . If you can proactively create policies which cover issues such as profit allocation, transition , the role of in-laws, training and reviewing of family members in the workplace then many crises can be avoided before they arise.
6. Honesty is a Policy
In our experience with family businesses, as difficult as it may seem, honesty is the first and last policy. “Remember, “this is how we’ve always done things” is the rallying cry of a family willing to settle for an 85% chance that the business will not be around for the third generation. If you want to beat those odds, than you need admit that what may have worked in the past may not be good enough for the future”
7. Keep the Dialogue Going
“ Develop a system of communication and accountability that ensures all this hard work has a lasting affect. Put structured communications in place – quarterly financial reports and an annual meeting – so owners get formal updates from managers (hopefully away from the dinner table)”. If Step 1 was about talking then this one is about talking some more. Keeping that dialogue going, keeping family members active and involved will only enhance the performance of the business and the satisfaction of the family members.
At FINH we agree that thoughtful and proactive governance is the key to managing a business for long term success – even up to 46 generations!
If you would like FINH to assist in taking the steps to make your family business last for generations please call on 3229 7333 or email via our contacts page.
If you would like a copy of the Century Article call or email via contacts page.