How do you run an Enduring Family Business?
How do you ensure the businesses that you have painstakingly built by you survive beyond you? You have built a successful business led by yourself and it is time to transit this business of yours beyond a single leader. What are the important attributes that enduring family businesses have and how can you start the transitioning to ingrain these key attributes to transform your family business?
We have separately discussed on the importance on succession planning in our article “SME succession planning is beyond “conferring them on younger strengths, while we undburthen’d crawl toward death.” dated 2 April 2019, which may be of interest for SME owner to read on.
This article will explore on what are the key attributes of an enduring family business and how these collectively work to ensure your family business lasts for generations.
Family business is very similar to any commercial business and the key uniqueness being the element of “family”. The family values and synergy how these values drive synergy amongst the family members is what is central to all family business. It is important that these values remain and continue to generate positive synergies instead of negative synergies. Therefore, it is vital that one understands that it is a “family” business because of its uniqueness and critical success factor. The element of “family” is a means (provided it is a positive factor) to an enduring end, not the other way round. It is a family business because it may be family owned or operated but this should not be the end game. Keeping wealth within the family is more effectively done by wealth management and not by a dogged desire to retain business control within the family (at the expense of a suboptimal business performance). This is an emotional issue and one has to understand the importance of looking at business and ownership separately and the concept of principal-agent.
With this understanding, it would be clearer when we start looking into the key structure of all businesses including family businesses – Management, Ownership, Family leadership.
Family businesses are started mostly by a family founder (or members) and expand under the leadership of that single founder. The business challenges and the governance issues evolve along the way as the business increases in its size and complexity, the same single operating model of management-ownership-single founder may no longer be optimal in ensuring the business success. Divergence amongst the management, ownership and family leadership would become more apparent in larger and more complex businesses, simply because it is even harder to find the best fit of person that can transcend from management, ownership and be a charismatic leader for the family.
Achieving strong business performance requires the best fit in management and one has to acknowledge that a good manager is not necessary a good investor or the best leader in driving the family values.
The key is to ensure that the best person is driving the management of the business and getting a management board that is the most effective. It is getting the best management team and not just the best leader (“What is a good guidance for the composition of an effective Board of Directors?” April 9, 2019)
Maintaining family control or ownership is separate from management. The retention of family ownership needs to be balance with the funding needs of the business, as there is always a trade-off and limitation of family cash vs outside funding. In some businesses, the exclusion of outside funding from institutional investors whom usually expect a higher return on a shorter term, may be beneficial for the long-term sustainability of the family business.
Separately, restriction on the transfer of share ownership by family members can be controlled via customised shareholders’ agreement with commonly, first right of refusal to fellow family members on share disposal embedded in the agreement. But it is always most effective that the desire by family members to retain ownership is driven by the leadership on the family values and not by that shareholders’ agreement.
- Family Leadership
Family businesses that survive for many generations have strong family values that drive the family businesses and providing an enduring purpose for ownership.
For family with diverse businesses, it is usually governed and driven from a central family office that ensure a consistent family values in all family businesses. Both management and ownership of the family business is no longer just a wealth preservation mission, but a projection of the family values with a purpose for managing or owning that businesses.
The family values must drives all governance with clear written and established guidance on selection of management board, executive management selection on meritocracy, strategy formulation, ownership structure, succession planning etc to keep all avoidable familial conflicts at bay.
Ultimately it is the family values that are unique to a family business, and giving it an enduring purpose beyond wealth preservation. Successful family businesses have been driving its values through meaningful philanthropy foundation by nurturing values in their contribution to the community. This provides strong sense of values and pride for new family generation. It is not just a commercial purpose in continuing the family business but an obligation and sense of responsibility to ensure that the values stay. And ensuring that family business endures the test of time (the means) is the only way that these unique family values will continue to last for generations (the end).
The End of the article.