Essential Guides – Family Tools
By The Year of the Canadian Entrepreneur – March 26, 2007
Even the most successful family business can benefit by adopting specialized processes and systems. Here are five tools you need to know...
Deep down, many corporate executives secretly envy the comfort and camaraderie they associate with a family business. While not all family companies fit that mould, the experts say that families who master their businesses’ potential have an edge over non-family competitors.
"There’s a trust that you don’t have to earn over 20 years of working together," says Eric Morse, professor of entrepreneurship and family-owned business at the Richard Ivey School of Business in London, Ont. "It allows for decision-making to be done in a different way. There’s a longer-term outlook on the business and a willingness to really create value over the long term." First, however, families have to overcome the common pitfalls of family-owned businesses: internal squabbling, unresolved conflicts, mixed messages and a failure to listen to new voices. But you don’t have to start from scratch. Here are some of the top tools and best practices the experts recommend to make your family business function at peak potential.
1. Form a Board of Advisors Consultant
Aron Pervin of Pervin Family Business Advisors in Toronto tells of a friend who took over the family business after her father passed away. Knowing she would need a sounding board, she set up a board of advisors. Then she couldn’t sleep for two days before the first meeting because she dreaded exposing her decisions and financials to outside scrutiny.
But Pervin says she soon discovered the value of outside perspective: "It allowed her to get advice from some independent people and in turn feel more in control. She was able to make better decisions and get better feedback," he says. One year after that first board meeting, he says, "she was on the circuit telling everyone they should have one." According to Pervin, family businesses with advisory boards have higher survival rates than those without. By being brave enough to accept outside advice, you’ll learn valuable lessons that will help you succeed.
Finding candidates for your board is the hard part. For your first board, enlist people you trust, so you’ll feel comfortable opening up. As you gain experience, fill your board with people who can help you attain specific strategic goals. If you want to do business in China, says Pervin, "get someone on your board with Asian business experience."
2. Schedule Family Retreats
Even close families can have bad business habits or decade-long conflicts. Emotional issues will always challenge business success, so why not confront them before they get out of hand? Families can resolve sticky personal issues and adopt sounder business practices by holding "retreats" in neutral territory, away from the office. Francine Carlin, owner of Business Harmonizer Group in Vancouver, is one of many advisors across the country who works with families to strengthen their communication skills and overcome emotional barriers so they can run their businesses more effectively.
Facilitators such as Carlin can be hired for sessions lasting from three hours to a full weekend, monthly or quarterly.
Before each meeting, Carlin interviews family members to get a feel for the group dynamic and identify key issues. "Whether you are a billion-dollar company or a million-dollar company," she says, "the issues are the same: people need to know how to talk to each other. The family needs to have a safe place where people can talk to each other like they’ve never talked before." Think that sounds too touchy-feely? Think again. The key to business continuity is ensuring that owners’ relationships are rock steady, through good times and bad. As Carlin notes, how people deal with these emotionally charged issues can break their family business, or make it stronger.
Carlin cites two brothers-in-law who contacted her as they struggled to recover from the sudden death of their third business partner, the brother of one of them. The partners were having trouble coming to grips with his death in an auto accident two years earlier; it was hurting the business and creating a rift between them. Meeting with the partners and chairing the discussions, Carlin identified the heart of the matter: "It became clear that we needed to create a memorial for the brother who had passed. We all have to be able to deal with the passing of a family member, deal with that grief and move on." The partners decided to create a scholarship at a local university in the field in which the family business is involved. "The feeling with these two people was relief and closure that they could do something to honour him," says Carlin.
Another of Carlin’s clients, a third-generation Vancouver family, was concerned about passing on the family’s core values and respect for money to the younger generation before the business was passed down. Without that shared perspective, they feared bad feelings could grow between the generations.
Organizing a weekend retreat, Carlin encouraged the family to promote their values by creating a foundation to endow funds for community betterment. Within a few hours the group had created a philanthropic philosophy and a slogan. "It was amazing to see even the very young members of the family get excited and proud that they were creating something on behalf of the family that would be helping others."
3. Create a Business Owner’s Plan
Business owners rarely talk about their personal plans - even with their closest family members. That’s why Anna-Marie Stuart, a Halifax-based partner with Grant Thornton Consulting and national leader of the firm’s Family Enterprise group, recommends creating a "business owner’s plan." Different from a conventional business plan, an owner’s plan is a new-style document being adopted by more and more entrepreneurs to record their personal and financial objectives. The goal is to give them the flexibility to choose how and when to retire - a life-changing event that often turns messy when not properly thought out.
"Without knowing what you want to accomplish by when, you could be placing your investment at risk by not giving yourself enough time to build the business value, solicit buyers or transition to the next generation," says Stuart. "Children may assume they are being given the business rather than expecting to buy out the parents’ investment. This can create real tension and potential financial difficulties." She cites one client who was passing on his business to his son.
Father and son both assumed things were under control, but they had overlooked discussing the fine print. "When we met to talk about the details," says Stuart, "it became clear that Dad’s plans to retire in two years and get paid out for his ownership over five years did not coincide with the business plan to grow the business supported by a capital investment in year three." With a business owner’s plan, the issue would have surfaced sooner, allowing more time to adjust the business plan or for dad to alter his personal plans.
4. Hire an Interim CEO to Mentor Successors
Some business families feel uncomfortable with an outsider at the helm. But what if the chosen successor isn’t ready? Don McLauchlin, vice-president of client development at Torontobased Roynat Capital, says one firm found relief by installing an interim chief executive to manage the business while also mentoring the founder’s 22-year-old grandson. The mentor (let’s call him Bruce) started by addressing several overlooked problems:
- He convinced the 80-year-old founder to get his will and estate-planning in order, to prepare for any unexpected crisis.
- He formed an advisory board consisting of friends of the family and a retired banker - not just to advise management, but to provide continuity should any mishap befall the founder.
- He formed a family council for other family members to discuss business issues.
- He encouraged the one grandson with an interest in the business (call him Jim) to work more closely with staff to build mutual trust and inderstanding. Finally, Bruce gave Jim tasks of increasing difficulty, making it clear he had to earn the right to run the company. With Bruce’s help, Jim performed beyond expectations, leaving no doubt that he is prepared to take over when granddad is ready to leave.
5. Produce a Succession Plan Well in Advance
In a well-known cartoon, a business owner introduces his son to his top manager and says, "Harris, I want you to show my boy everything you know. Even if it takes all day." For some owners, this gag hits too close to home. Last year, the Business Families Centre at the University of British Columbia’s Sauder School of Business reported that more than 75% of family firms have no succession plan in place - even though the stats say seven in 10 family businesses don’t su rvive the transition to a second generation.
"Part of the reason for the failure rate is that the next generation doesn’t have the same level of understanding of the business," says Ivey’s Morse. Many successors are less interested in learning the details, which can create a problem when they take charge.
Roynat’s McLauchlin says he rarely sees a succession plan.
"Most business owners don’t even want to talk about succession, let alone prepare a formal document," he says. "Most of the time there is a trigger - good or bad - that forces things into play." Many experts recommend business owners start grappling with succession issues at least five to 10 years before their planned departure. Even before you start formal planning, however, you should begin identifying likely successors. "Who you select as a business successor, whether family or not, should be the right leader to preserve and develop the wealth of the enterprise and protect the legacy you have created," says McLauchlin. "You must develop that leadership far in advance of your own decision to exit." Some business owners hire external executives to train the successor, but McLauchlin says the most successful transitions may involve kicking successors out of the nest to get independent business experience. "This gives the person more credibility," he says. "They come back with more to offer the company."