A set of succession rules will help your children and spouse address ownership issues after you’ve left the scene.
This article originally appeared in the July 2015 edition of INSTORE.
Dear Family Business Owner(s): “Can you paint a clear picture for the next generation for the next 50 years with respect to employment, management and ownership opportunities in your business?”
When it comes to handing over the reins of a family business, there are always a large number of unknowns, especially for the future owners. For example, will I ever get to be a manager or owner in the family business — and if so, when? How will my ownership be funded? Will I have to share ownership with my non-active siblings?
All these questions need to be answered in order to paint a clear picture and in turn minimize conflict or, better yet, avoid it all together. When there is conflict in the family due to the business, a large portion of it can be attributed to differing expectations. When certain topics are avoided, the likelihood of experiencing varying expectations or opinions increases, as does the likelihood of conflict.
Current family business owners have a moral obligation to address these tough questions before it is too late. Far too often, it is left to the next generation to iron them out, or worse yet, it is simply left to the spouse to deal with.
By endorsing a set of Family Business Rules that stipulate the required qualifications to be an employee along with the agreed-upon criteria to be part of management and ownership, the next generation will know what is expected of them should they choose to work in the family business. For instance, many successful families have stipulated that only direct descendants of the founders can own shares of the company. This establishes a clear pool of potential owners while at the same time dealing with the very sensitive issue of spouses, in-laws and employees becoming owners. Further, some families will insist that any family member aspiring to join management have a certain number of years of external work experience as well as a certain level of education. This ensures that family members who make it to management are competent.
“Some families stipulate that only direct descendants of the founders can own shares of the company, to deal with the sensitive issue of spouses becoming owners.”
Additionally, for family members who have made it into management and aspire to ownership, the Family Business Rules will often require they have at least 10 years of full-time work experience in the company of which five are at the management level. This ensures those entering the ranks of ownership have earned it. This also means only those who work the business will own the business.
Another rule family businesses often implement is the purchase of the business at fair market value by the next generation successor(s). This is an important consideration when there is more than one sibling and not all siblings are active in the business. This is intended to ensure that no sibling(s) has been privileged due to his or her life choices. This rule goes a long way in safeguarding family harmony among siblings.
The rules will differ from family to family; however, their purpose is to minimize conflict by outlining what is expected or required, and by ensuring all family members know and understand the rules. Once endorsed by the active family members, the rules should be communicated to the broader family (active and non-active family members) so that there is a common understanding among all family members.
By establishing and applying a set of endorsed Family Business Rules, family business owners will be able to paint a clear picture for generations to come with respect to employment, management and ownership opportunities, thereby significantly increasing their likelihood of long-term success. Successful family businesses that have developed their Family Business Rules often do so with the assistance of trained family business advisors (i.e., family business practitioners).
Danielle and Grant Walsh own Walsh Family Business Advisory Services, which works in partnership with Edge Retail Academy. Email them at danielle@walshfbas.com.