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A Mystery Wrapped Inside an Enigma

"A friend loves you for your intelligence, a mistress for your charm, but your family's love is unreasoning; you were born into it and are of its flesh and blood. Nevertheless it can irritate you more than any group of people in the world." Andre Maurois, The Art of Living

For many people, the business world is inhabited by giant, faceless corporations. In fact, research indicates that more than 80 percent of the privately-held corporations in Canada are family-owned businesses (FOBs) where the environments is quite personal. Many FOBs provide financial security and career opportunities for their founders and for generation to follow.

But FOBs also can be sources of disruption, causing otherwise harmonious families to be torn by animosities and dissension. The mix of love, resentment, jealousy, money, security and status can be a witch's brew

The Life Cycle

Many FOBs fail in the first 10 years because of the usual problems afflicting new enterprise: under capitalization, poor management and lack of product acceptance.

Some businesses cease to exit as FOBs by going public or selling out, which is not necessarily a negative fact. The sale of a company may be consistent with the objectives of the FOB, or the owners may be forced into it because they have not solved the problem of management continuity. However, a significant number of public businesses are still family controlled. According to one study, public companies in which one family owns at least 30 percent of the stock are substantially outperforming the stock market as a whole.

Most new businesses are launched when the founder accumulates enough know-how to start a new venture. Traditionally, this first phase takes place among entrepreneurs in the 30 to 40 year age bracket. The next phase consists of building the business from an idea into a reality. It then becomes vital to develop a management team and provide for the continuity of the business through the training of successors.

There are many obstacles to starting and building a successful business. The entrepreneurial qualities that enable the founder to overcome these obstacles can differ from the factors needed to teach others to succeed him/her, and the process frequently breaks down at the teaching phase.

It's hardly coincidental that the average time between start-up of the company and the death of the founder are both 24 years.

The Founder

To understand the complex dynamics of the FOB, it is necessary to understand the successful founder, the creator, owner and driving force of the business.

The founder is totally dedicated to the success of the business. S/he probably left a well-paying job, went into debt to start the business and has learned how to survive in an intensely competitive marketplace. The owner has paid his/her dues, so to speak, and now, having made it, intends to protect the business and his/her position as its leader at all cost.

But when the business grows beyond the ability of one person to make every decision, or when the founder fails to provide for adequate succession, the business's success - or even survival - is threatened.

In the start-up stage, the founder is the master juggler, the only one who knows how to keep all the balls in the air. There is generally no long-term plan for growth other than the founder's intuition, and key positions often are filled out of expedience and chance rather than through planning. Bookkeepers may grow to positions of great authority just because they were there in the beginning. Lack of a competent management team may force the founder to spend more and more time putting out fires than planning for the future.

There may be constant discussion about organization and there is likely countless organization charts relegated to the desk drawer because almost everybody still reports to the boss - who wouldn't have it any other way.

Some founders, however, successfully make the transition form entrepreneur to manager team that resources will allow. They learn how to select competent professional advisors and listen to them. This, combined with a careful balance of both present and future needs and priorities, in much of what professional management is about. The founder's inability to make this crucial transition is a principal cause for the high mortality rate of FOBs.

Relatively Speaking

In addition to management problems common to every business, the family in business, the family in business together has a special set of problems, complicated further when more than one family unity is involved. In addition to the traditional involvement of the son, son-in-law, and cousins, female family members are also becoming actively involved.

Family involvement may be marked by sibling rivalry and scheming for position, further complicated by the disparity in talents and abilities that the sons and daughters (and in-laws) bring with them to the business. This may result in unhappy family members and even less happy spouses. ("Why should he have a Mercedes while you drive a Ford? You work just as hard!") Should they have equal authority?

The role of the founder's spouse is both significant and difficult, as are the demands made on her/him to change and grow along with the business. In the early years, s/he may raise the children practically alone. After the children are grown, they, or their spouse, may enter the business. Now the spouse may have to hold the family together through new crises.

Picture the scenario in which two sons-in-laws Smith are in the business. Son-in-law Smith has an aptitude for the business and has taken on considerable management responsibility. Son-in-law Jones would rather play the guitar for a living, if only it paid as well. He has reached his ultimate level of competence as supervisor of the shipping department.

Now the founder (Mum) has decided that son-in-law Smith should have a higher salary than son-in-law Jones and an office commensurate with his job.

Daughter Jones is crushed and complains to Dad: "You've got to talk to HER. How could SHE do this to me?" Good luck, Dad.

Failure to plan for and deal with these issues sensitively and honestly had led to the break-up of many families and, in many instances, the business itself. These problems could be alleviated if it is clearly understood that management positions must be earned. This is not to suggest the demise of nepotism; only that merit must be an important consideration. Family members should be told about he compensation and stock ownership policies before they enter the business, if possible. These policies are much more apt to be accepted if they are clearly understood in advance.

Management Continuity – The Critical Issue

In the world of giant corporations, hiring for management positions is the result of careful screening of a large field of qualified applicants. In FOB's however, the field generally consists of a limited number of family members.

Some family members may have grown up in the business. They might have educational backgrounds in management and may be better equipped than the founder to lead the company through the next stage of growth. Their proprietary interest in the business is one of the great strengths of FOBs.

On the other hand, family members may be elevated to management positions solely because of the family relationship and because they lack a career alternative.

One of the greatest obstacles to family management continuity is frequently the founder. S/he is generally a doer rather than a teacher, having little patience or inclination to undertake the difficult (and perhaps distasteful) task of addressing the continuity issue.

If possible, potential management successors should be allowed to manage a segment of the business first.

Many founders feel the same way about death as Woody Allen, who said, "...some people try to achieve immortality through their offspring or their works. I prefer to achieve immortality by not dying."

It may also be advisable for potential management successors to learn their skills outside the business. This will allow them to grow according to their own abilities and learn management skills in an objective atmosphere. This isn't for everyone, but it can be the answer in some instances.

The founder should recognize that one of his or her most important responsibilities is training a successor, even if he or she makes mistakes. The successor may not be a clone of the founder and will have to develop and manage in accordance with his or her own style. It is important not to assign too much responsibility too soon.

Outsiders

Outsider advisers who can provide sound and objective advice, not only on business matters but also on emotional issues arising from family involvement in the business, are always a benefit - never a nuisance.

The boards of directors of most FOB are composed of the minimum number of members required by law, and their principle responsibility is limited to singing the necessary legal documents as instructed.

Many FOBs are finding, however, that an independent, outside board of directors that meets regularly and addresses itself to business policies can advise management effectively.

Planning

The primary focus of ownership continuity is on the control of the transfer and distribution of power.

The primary focus of estate planning is on the control of the transfer and distribution of resources.

A well-defined estate plan should encompass the founder's/owner's objectives both in life and afterwards. As a related issue, the owner should also engage in personal financial planning to ensure, satisfy and protect his/her own future and present needs.

Simply put, in estate and financial planning the most important thing to remember is that business circumstances and tax laws change constantly. Owners should get the best possible advice on their estate plan and review it periodically.

Survival

The family owned and managed business is truly a mystery wrapped in an enigma. Bringing out both the best and worst of human emotions, it can be the "golden goose" than provides sustenance or the cause of otherwise harmonious families being blown apart.

More family-owned businesses would succeed if their founders followed these guidelines:

ALL ARTICLES PERVIN FAMILY BUSINESS ADVISORS INC.

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