Plus Five Elements to Promote a Forward Looking Culture

For the founder of a successful family business, few things are further from the mind — and perhaps more frightening to contemplate — than the thought of retirement. The idea of stepping back from active management, turning the business over to family members or selling the company, can seem inconceivable. Indeed, the business acumen and personal attributes that enable family business founders to be successful sometimes stand in the way of retirement. For leaders of a family enterprise who thrive by exercising power and influence, retiring can mean losing both their business identity and control of the family.

While it’s natural for a founder to have second thoughts about letting go, committing to a fixed date for retirement encourages the founder to start preparing — mentally and organizationally — for leadership changeover. You can then approach retiring the way you would approach a new business opportunity:

• Formalize the transfer process to help ensure a smooth transition.
• Ensure that all transition agreements are clearly detailed and communicated to foster buy-in by all relevant parties.
• Engage attorneys who are specialized in issues related to succession planning.
• Tap experienced advisors to provide business evaluations, review options and build healthy financial plans for relevant parties.
• Reach out to professional coaches for help with psycho-social and other aspects of the transition.

Managing Roadblocks

When family business founders approach retirement, they may unwittingly have put in place roadblocks to long-term success. These roadblocks can include lack of adequate planning; failure to identify and nurture family talent; failure to properly reinvest capital; inability or unwillingness to make necessary business changes; operating without a clear mission; adopting unreasonable goals.

Founders who strongly identify with — and become deeply entrenched in — the business may become overconfident and resistant to advice. They may assume growth will continue and are blind to innovation and forces of change. They may expect a successor to run the business like they did. They may cater to people who avoid challenging decisions or the status quo. They may cite concerns about the family’s financial security as a key reason for not wanting to exit the business.

The attributes of a successful founder can become barriers that frustrate the next generation, undermine the business culture, and seriously hinder a successful transition. Taken together, these roadblocks can jeopardize the sustainability of a family business. The challenge of holding on to control is especially acute as life expectancies become greater. A large percentage of family-business leaders now plan to wait until they are well past 70 to retire.

Promoting a Forward-Looking Culture

In a family business, the founder typically establishes the culture and its attendant values. The classic attributes of a family business culture are the prospects of building a successful business, balanced by a healthy appetite for risk. Founders deal with uncertainty, the possibility of failure and the attendant financial and emotional impacts.

Unfortunately, when founders resist relinquishing control, the business culture can become stale, stifling innovation, adaptability and other factors that drive success. Family members who would otherwise be in line to take over may elect to further their careers elsewhere, where they may adopt a different world view, no longer willing to accept the risks and other attributes associated with a family business.

This is partially why most family-owned businesses don’t make it past the first or second generation, and why subsequent generations typically do not retain most of the wealth generated by the business.

Best practices for operating family businesses include strong governance, a family constitution, a robust trust structure and open lines of communication. But what makes family businesses successful across generations is a forward-looking culture that enables the business and its owners, along with the entire family, to grow together over time.

Promoting a forward-looking culture includes the following five elements:

Learn

Endorse continual learning to benefit from the knowledge of industry peers and the insights of rising generations within the family. Recognize that business cultures should adapt to changing environments, and that a successful family business requires teamwork, alignment and collaboration. Reinforce the idea that making difficult choices may compromise competing interests.

Adapt

While past performance is often a good indicator of future performance, that’s not always the case. Operating environments change with evolving technology and competitive factors. Good family businesses incorporate an expectation of adaptability into their culture.

Business cultures can be expressed across generations in numerous ways. Where the founding culture is typically driven by a desire for wealth creation, subsequent generations may want to adopt a broader mission to include philanthropy, social entrepreneurship, impact investment, etc. Consider establishing and supporting mechanisms for family members to articulate and operationalize within the business culture.

Evaluate

Assess the next generation and align their interests and capabilities. Identify roles various family members can play that capitalize on their own passions and strengths. Determine if these roles are best suited to help maximize business value. Assess the skills and qualifications of potential leaders. Create appropriate development plans and determine how they can best fit within the family enterprise.

Communicate

An environment that fosters open lines of communication encourages people to express their thoughts and concerns. Because every generation brings unique perspectives to the table, recognize and manage disparities between generations. Foster an environment of inclusivity, where every voice is heard and respected.

Business landscapes evolve, so keep the family abreast of critical issues and industry trends. Encourage and support ongoing education on business systems and competitive practices. Create an environment that reflects the family’s core principles and beliefs. Encourage open discussions and regular family meetings. Support opportunities for collaboration and contribution. Recognize achievement. Take the opportunity to reinforce beliefs and goals.

Emotions can run high with family dynamics, so it’s important to maintain a delicate balance when mixing business and family issues. Approach difficult conversations with active listening and a genuine desire to understand each other’s perspectives. Tackling delicate subjects early and directly helps minimize conflict and foster issue resolution.

Embrace

The business culture should be built on a foundation of trust and commitment, supplemented with open communication and shared decision-making. Successful family businesses foster a dual commitment toward both the family and the business. Cultures of dedication and loyalty develop when family members are fully invested in a shared vision and given the opportunity to achieve it.

It’s also important to strengthen family bonds outside of the business. Family retreats can provide opportunities for relaxation, fun and quality time together. Promoting a healthy work-life balance ensures that family relationships remain strong, even when business demands are high.

Conclusion

The good news is that retirement can benefit the founder, the business and the family. The transfer of power and ownership can be structured to maximize continuity and thus preserve a forward-looking business culture. This way, when founders do retire, they can remain as stewards, allowing them to stay connected with the business and add value from a managerial distance. When family members not already part of the enterprise are ‘ready, willing and able’ to become seriously involved, the culture should easily transition to the next generation, thus help ensuring long-term success of the family business.

Stephen N. Wilchins is a founding partner at Wilchins Cosentino & Novins LLP. He leads WCN’s Private Client Services practice and advises leaders of privately held businesses on strategy and planning from formation through succession planning.

To assist you with strategy and management, succession planning, and exit strategies, please call us at 781-235-5500 or Contact us.

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