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Jan 29, 2024 | Blog, Business Law

Keys to Building a Great Family Business

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Family-owned and run. It has a wonderful ring to it. And given the allure of working closely with relatives to pursue their collective dream, the family business has historically been a very popular business model. Indeed, in the US alone, more than five million family businesses employ nearly two-thirds of the workforce.  

There is, however, a significant difference between having a family business and successfully growing it. There are considerable challenges involved in furthering a shared business vision while also managing complex family dynamics and highly personal relationships.

Below are keys to building a great family business:

Determine the proper ownership structure. There are several types of ownership models available for a family business. Consult with your advisor to review these alternatives and determine which structure is best and supports your vision for the business.   

The profit motive still applies. Unless the family enterprise is set up as a charity, it needs to operate as an income-producing business with positive cash flow. At the very least, that requires competent management, intelligent strategic planning, adequate business systems and capable, motivated employees who are accountable for their performance. Employing an underqualified relative, or even worse, someone who just freeloads, can disenfranchise others in the business and should not be an option.

Support business growth with prudent capital additions if necessary. Be cautious when developing new products / services or when considering entry into new markets.  Evaluate your prospective investments and ensure that they are or will be accretive.  Engage competent financial advisors to keep the business on the right fiscal path.   

Maintain a traditional management & governance structure. Businesses have leaders.  Complex businesses have management ranks with hierarchal leadership and clear protocols for decision making. The concept of bosses and subordinates does not always translate well in a family structure, so it is critical to get everyone on board with the business / management structure and decision-making process.

An early-stage business should have an Advisory Board, where a carefully chosen group of outside experts can add value in multiple areas, including growth strategy, market development, technology deployment, operational excellence and raising capital.  

As the business successfully scales and becomes more complex, the stakes get higher.  At this point, it is advisable to establish a Board of Directors to provide formal oversight and custodial decision making in several areas, including executive compensation, high-level business strategy, risk management and financial control.   

Keep business and family separate. Put simply, what’s discussed in the office should generally not be discussed in the living room. It is admittedly difficult to separate professional and personal relationships in a family business, and it’s easy for disagreements over business strategy, operational matters and employee performance to penetrate intra-family affairs. Strive to minimize contentious conversations and frame these discussions as constructively as possible. Consider a forum for identifying business-related conflicts and discussing – and hopefully resolving – them in the office.  When business conversations do take place at home, ensure that they are appropriate and controlled. Do not let the comfort of a home environment invite emotions into the discussion.

Cement the mission and the vision. A family business is less likely to succeed if there is not widespread buy-in and support of the mission and vision. The mission should define the ‘why’ of the business while the vision statement should clearly articulate what the family hopes to accomplish through a successful business. Communicate early and often about the vision and business goals for alignment and prioritization. Focus on the long term, the steps necessary to achieve objectives, and the importance of everyone working together.

Reinforce the vision of the business consistently. For visions that include social initiatives, appreciate that some family members may not initially embrace these elements and it may take time to solidify alignment.

A broadly embraced mission goes a long way toward stimulating business performance and retaining employees.

Strengthen the family as you build the business. There are too many examples of succeeding at all costs, and alienating employees and others involved in the enterprise. With a family business, these concerns are magnified through an emotional lens, and if left unchecked, they can destroy a family legacy. Consider establishing a Family Council with broad and active participation. Provide forums for information sharing, discussions and decision making. Reducing the element of surprise helps everyone get – and stay – on board.

Use the business as a lever to promote and fund family gatherings and to sponsor educational and other activities for the younger generations. If the mission includes social initiatives, then consider promoting activities aligned with those initiatives.  Engage the children to leverage their social networking skills to build structures that enable family members to remain connected.

Cultivate internal talent. The cream usually rises, assuming it’s given the opportunity.  Start the process early and identify the best management candidates from within the family. Ensure that they have a solid education. Help them develop talents and skills that complement the business. Cultivate their leadership traits. Then give them a chance. If this requires initial work experience outside the family business, encourage and support that path.

Look outside the family for key talent. As the business grows and scales, it’s increasingly important to attract and retain top talent. This is often a challenge with smaller, family-run businesses, as potential employees may be concerned about their career path within a family-owned company. The good news is that larger family enterprises look increasingly like their public brethren, with market-leading employment hiring practices and attractive career advancement opportunities.  Consider engaging a search firm to find key employees and endeavor to create a welcoming culture in which non-family employees feel like close relatives.

Embrace Innovation and Change. No business is static. Every business operates in a dynamic environment where changes in customers, processes, technology and competition require leadership to adjust course.

Maintain an open mind to innovation in all areas of your business. Listen to younger generations, who are generally in-tune with newer technologies and informed on innovative advancements and how they impact their lives.

Establish a Circle of Trusted Advisors. A common problem of family businesses is failing to have objective insight and perspectives. As mentioned above, a Board of Directors is one way to augment leadership and insight, but there are additional advisors and professionals typically outside of the Board of Directors that offer important guidance and counsel. Engage such professionals to provide insight that is especially important for a family business.

When properly managed, a successful family business can accumulate substantial wealth. The consequences for inefficient tax and estate planning can be severe. As the founder looks toward retirement and ownership transition, these concerns are magnified. This can be especially true with a diversified business and complex family structures. Make sure to have a qualified estate and tax attorney on board.

When an enterprise successfully scales, the stakes for under-performance following ownership / management transition become much higher. As described in a previous article, a poorly planned or executed transition can significantly compromise the transition process and the associated economics. It can undermine the business’s goodwill with employees, customers and suppliers; disenfranchise the next generation; and weaken the company’s long-term prospects.

However uncomfortable the thought, endeavor to incorporate succession planning early in the company’s life. Be mindful of rising talent; identify potential successors and evaluate their strengths and weaknesses. As the company matures, formalize this process and engage an outside advisor to help if needed.

In a family business, some issues may be too delicate to be addressed by family members. In such cases, it is usually helpful to engage outside consultants who can bridge real-world experience with unbiased perspectives.

Conclusion

Building a successful family business that spans multiple generations takes a combination of vision, dedication, patience, empathy and humility. For family-oriented entrepreneurs, it is the quintessential American dream.

At Wilchins Cosentino & Novins LLP, we guide and counsel owners of family-owned businesses from formation to succession planning. Learn more about our firm’s practice areas including Private Client Services, Business Law and Employment Law where we provide legal counsel for closely held businesses.

We welcome the opportunity to assist you in building a great family business.

Contact us.

This article is not legal advice and should not be taken as such or relied upon as legal advice.

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