Arthur J. Swerdloff
It was recently reported that corporation startups in California last year were the highest since 1989. According to the report, a total of 48,301 new businesses were incorporated in the state and a significant percentage of those are family run.
Within those organizations is a breathtaking amount of energy, enthusiasm, financial and human resources. Unfortunately, four out of five businesses fail within five years for lack of good management and financing.
And for the family businesses that do survive, the majority do not make it to the third generation.
What can a family business founder do to maximize survival of the business and its resources for generations to come?
The key to avoiding the pitfalls and keeping the business in the family is to start early and to regard succession as a “life” plan, not a “death” plan. This can be accomplished by preparing potential heirs during one’s lifetime.
Here are some techniques that experience has shown are helpful.
Make sure the heirs are capable of running the business. A limited area of responsibility is not enough. Family co-owners and managers need a full understanding of the financial and human resource aspects of the business to assure survival of the enterprise.
Outside business education provides a firm base. The founder or co-founders need to share specific financial information and personnel decisions as early as possible with the heirs and on a continuous basis.
Keep business life separate from personal life. Running a business is stressful and demanding work. It is easy to skip dinner with the family, postpone vacations and holidays, and neglect personal health. It is not easy to avoid non-stop business discussions at family celebrations with children or siblings who are active in the business.
Where siblings are active in an enterprise, it may be desirable to split up the business into independent companies owned by the brothers or sisters, as the case may be. Family gatherings thus may become the social and pleasurable events they should be.
Many founders try to be fair to all the children by giving or leaving equal shares of the business to each child. A better practice is to cash out non-employee children to leave them freedom to pursue their own goals.
Those children left in the business can then be granted ownership and authority by ability, rather than seniority or gender.
There was the case, for example, of a father and son who could not get along in a second-generation manufacturing company and whose arguments carried over into family get-togethers, agreed to split.
The father helped the son finance and organize a new division in which the father remained an investor. The division was spun off as a separate company. The son’s new enterprise eventually grew to a sales volume surpassing the father’s company.
The son took great pride in his accomplishment, the father received a healthy return on his investment, and family gatherings grew more pleasant.
Make sure the heirs want to be in the business. Many founders assume that the children will naturally want to carry on the family business. Often, the child forced to work in the family business rebels and leaves the business at a crucial time.
A successful strategy has been to require the children to work for an outside firm, preferably in the same industry, to gain experience and a sense of responsibility to others in authority. After three or four years, the family member is brought into the family business to work under other supervisors until ready and willing to assume senior responsibility.
Learn the dynamics of communication within a family business. There are issues unique to the relationships in family businesses which may hamper good communication among the family members and other senior managers.
Many family businesses employ professional facilitators to conduct monthly meetings within the company to flush out issues and solutions to problems. A professional advisor can often restore balance and a sense of humor to tense situations.
These monthly sessions can relieve the stresses and strains which inevitably creep into even the best of relationships. Excellent problem-solving help is available through books, seminars and consultants.
Family enterprise institutes have been established at many major universities which study and counsel family companies.
Use professional management as the business grows. It is essential to develop good outside board members and advisors. The building of the professional board should start as early as possible.
Experienced outside advisors can spot emerging problems and suggest solutions before the situation becomes unmanageable. This objective viewpoint can cut through family rivalries and blind-spots before the growth process is jeopardized.
Arthur J. Swerdloff is a partner in the Marina del Rey office of Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone.