O'Keefe in the News

The Next Generation – Preserving the Family Business

The Next Generation – Preserving the Family Business

April 10, 2017

As published in Michigan Lawyers Weekly

By Carolyn Riegler, Director

The family-owned business has an unusual set of relationship issues. Multiple generations work side by side. Separation of work and family roles, although desired, is almost impossible. Weaving the family dynamics with business challenges is a combination of deliberate planning and tough decisions.

There are many successful family-owned enterprises who have gone through tough times and have made choices to ensure the viability of the business for the next generation. Passing the torch is a difficult process, many family businesses do not survive through the second or third generation.

A third party is often the bridge that can help the business transition successfully. An outsider brings clarity and experience, unfettered by lifelong relationship issues between parents and children, cousins and grandparents. Key benefits of using an outside consultant or hiring and outsider for a key management position include:

1. An unbiased mediator- Often the outsider can act as the communicator between family members on confidential matters including acquisitions, taking on new debt, hiring and firing family members and employees, and evaluation legal matters. Often the outsider becomes a business “therapist” to allow family members to air their disagreements without impacting the business or employee morale.

2. Strategic business plan evaluation-Some family businesses have been on the same path for decades; the founding members may be resistant to change and new directions. A third party can ask the tough questions, look for creative ways to test new ideas and allow non-family members a sounding board for contributing to business improvements and strategies.

3. Voice of the employees-An outsider allows employees to have a non-family member to discuss grievances or perceived inequities. This can benefit morale and employee retention. Perceived nepotism is a big issue in family business; it takes a delicate touch to work through those types of issues with family members and employees successfully. Family favoritism can result in lost talent for the company if not handled well.

4. Transition planning- Founding members of the family business do not always want to recognize their ultimate departure from the business. They do not want to admit they will have to transition leadership one day, and thus ignore or defer adequate planning. This can lead to severe financial implications for the company and the family in the form of taxation of estates. Disruption in the day-to-day running of the business and thus profitability can also result due to lack of direction.

The privately-owned business will benefit from addressing a multitude of issues with their trusted advisor or non-family member executive. Three core areas set the foundation for building the future:

Establish team rules
Developing clear succession plans and shareholder agreements is key. Future expectations should be set early and communicated clearly and regularly to all members of the family. Agreements need to outline critical issues such as: Who will be in charge? How will decisions be made? Who will own the company? How will stock or member interests be transferred between family members? Who will have rights to future cash flows and profits? Should gifts be passed to minors, future descendants? Should non-family members be allowed to own stock?

Putting the rules in writing, reviewing and updating them on a regular basis, can prevent family dissent from distracting the business from its core purpose. An outsider can bring perspective to the discussion based on their experiences with other companies. They can offer alternatives the family members might not have thought of.

The rules should address compensation and promotion opportunities, taking into account the need to include non-family members in the equation. As the company grows, they will continue to need outside talent that the “family” does not have, and thus cannot provide on their own. It is important the company has fair and equitable benefits and opportunities for all team members, family or not, in order to attract and retain talent.

Establishing a path for the future can also facilitate preparing and mentoring the next generation of leadership. Experience is critical to an executive’s success in any enterprise. Often, the family member in a business has not had any work experience outside of the family. They may have only had one narrowly defined role in the family business. If a future leader is identified, the company can plan for specific experiences and assignments which can help mold the future management team.

Train the team
The founding members of the business often have talents which enabled them to create and build the business. These talents are not always shared by the next generation. It is important to assess each member’s skills, strengths and weaknesses to plan for their success. Formal education and training, externships with other businesses, internal department rotation and coaching are just a few techniques used to facilitate the planned development of younger family members to prepare them to lead. An outsider will bring a fresh perspective and may identify talents and abilities which have been ignored or hidden in the past.

It is important that the younger generation be given significant responsibility and accountability on a daily basis. The next generation needs specific areas of responsibility where they can learn to take calculated risks and gain confidence in their decision-making abilities. They must be allowed to make mistakes to enable them to learn.

Reflect and revise
Successful family-owned businesses often have a planning and advisory board made up of non-family members to help them plan for the future, and reflect on the past. A group of trusted, experienced advisors willing to communicate the truth, even if it means conflicting with management, is priceless.

The board should consist of individuals respected by family members; attorneys, CPAs, other family business owners, and community leaders are all good prospects for the advisory board. Meetings should be held on a regular basis, perhaps monthly or quarterly, depending on the business needs. Family management should be tasked with making formal reports and status updates to the board, promoting an environment of accountability.

The board can help the management team “stay the course” or change direction on a dime when needed to facilitate success. Advisory board members can also help mediate family conflicts to avoid lengthy and costly litigation between family members. The board can ask tough questions head on without concern. They can bring to the forefront creative ideas and thinking to challenge the status quo.

Strong businesses plan for success through strategic methods and techniques. The family business must also operate with discipline and forethought to ensure its viability for generations to follow. A third party advisor can help you achieve your goals through a combination of establishing the business rules and framework, training and developing your talent, and thoughtful reflection and planning for the future.