Keeping the Family Business in Business

Years of blood, sweat and tears can be lost because of one critical shortcoming: a lack of planning.

In recent years, the number of family-owned businesses that changed hands due to family squabbles and internal bickering has skyrocketed. The average life span of a family enterprise is 24 years, roughly the working life of the founder. The fact is that close to 70 percent of family businesses fail to make it to the second generation and almost 90 percent don’t make it to the third.

The reason for this lies in both the dynamics of the family and its interaction with the ongoing complexities of a business. Family relationships layered on top of office politics produce an organizational structure that has more in common with a Rubik’s Cube than with anything found in the traditional texts on management and organization.

In some cases, the ability to properly pass on the company according to the owners’ best of intentions can only be realized with the assistance of outside professionals.

The key to succession planning is that business owners should learn to think of tomorrow.

Identify your wants—Business wants should be thought of in operational, functional, and holistic terms. It is much easier to replace an accountant or technician than it is to find someone with an understanding of the entire business. Most business owners have great difficulty expressing their corporate vision to others in a practical sense.

The realization that you will not live forever or that you cannot continue to single-handedly control operations will go a long way to alleviate the stress associated with passing the business on.

In family owned-businesses where parents intend for their children to take over, too often children are allowed to come in and take over operations without the proper knowledge of the entire business. Owner-entrepreneurs have knowledge of their business second to none. This knowledge is a result of years of work throughout the company. This is the knowledge that you wish to pass on to your successor. Identify those qualities you have so that you know what to look for in others or suggest what they should work on.

Identify Available Resources

Once you realize what you need, your available resources can forecast your future needs to a large extent.

Money, while important to any business operation, can never replace knowledgeable, experienced and skilled personnel. Having loyal and well-compensated employees that will remain through a transition is crucial. These important human resources will keep you in business long after the machines have stopped. As an owner-entrepreneur, take yourself out of the equation and ask yourself what would happen if I was not here, and is this what I want to happen? The difference between what you want and what you have is the gap to be filled.

Document, Document, and Document

Intentions should never be left open to open interpretation. Be it for legal necessity or simply as a means to gauge performance, written documentation nullify the problem of misinterpretation. As an owner-entrepreneur, your intentions are usually not documented in any legally binding manner. Take the time to document, have a legally binding will drawn up to avoid the family squabbles that may result. You may believe that you are leaving a lucrative nest egg for your family, but what you might be leaving is a civil war.

Situations change and planning should be a continual process that reflects these changes. The failure to do so, unfortunately, can make well-intentioned documents to be outdated and creates the possibility of ignoring the owner’s true intentions.

A Dispassionate Perspective

Although this represents a more costly option, hiring a lawyer or consultant to review your plans is an effective way to ensure that your plan is properly and legally documented.

As a good example, a common predicament that leads to a number of company breakdowns occurs when an equal number of shares are left to children with different degrees of business knowledge. There is no directing control over who will fulfill the owner’s original intentions. Equality can be a wonderful goal in a democracy; however, a business is rarely managed as a democracy—somebody must be in total charge and able and willing to keep the company growing.  

Mark Borkowski is president of Toronto based Mercantile Mergers & Acquisitions Corporation. A mergers & acquisitions brokerage specializing in the sale of privately owned businesses. He can be contacted at [email protected]