Ellen Frankenberg, Ph.D.
Sometimes defining what you don't want, helps clarify what you do want. Understanding family businesses according to what they are not, can sharpen your decision-making about what you do want to accomplish.
Family businesses are not monarchies.
The United States rejected monarchy in 1776, and yet in spite of 226 years of rebellion, hard work, wars and political commitment to sustain our democracy, there remains, deep within our collective psyche, an expectation that the eldest son should inherit the kingdom. Even though other institutions throughout the world choose their leaders through some form of democratic or parliamentary process, many family businesses still function like monarchies. The gut feeling remains: the eldest son "should" inherit the kingdom.
Some family owners work hard at succession planning, developing criteria that their new CEO must meet - an MBA? a sales personality? a financial whiz? a technical expert? spotless integrity? - to keep their company competitive in its unique marketplace. Finally they reach consensus and announce the selection of their most competent leader, knowing that the whole company and the whole family will benefit. But if the third son or the youngest daughter is selected, neighbors still ask pointed questions in the supermarket: "I thought John was the eldest son… How come he wasn't appointed president?"
Family companies cannot afford to use a medieval approach to succession planning in a 21st century economy. If the younger brother really is more competent, everyone, especially employees, will know he should lead the company, and discontent can develop. If the eldest son is selected, successful families will choose him because he does offer the best qualifications, both tangible and intangible, to take their company to the next level.
Family businesses are not socialistic societies.
When mom and pop were raising the kids, the loudest squabbles happened when somebody shouted, "That's not fair!"- especially when the youngest brother got a better bicycle (probably because the family could afford it by then) or the eldest sister got to stay out later than the younger one. $10 for mowing the grass bought a lot more stuff when the eldest got it, than it did twelve years later when the youngest did it. Most parents learned then that, "Equal isn't always fair".
Each new birth in a family, with siblings born of the same parents, results in an original individual - with the same DNA ingredients scrambled like phone numbers. This diversity within the same family can provide an advantage to a family business, since unique talents emerge in each sib. Age and experience, motivation and adult life circumstances also accentuate differences between siblings.
But somehow, even in the midst of a capitalistic society, where competitive salary scales are widely available, many family businesses still pay all the siblings of the same generation - especially males - the same salary, whether they are vice presidents or warehouse managers. In an extraordinary effort to avoid conflict, some family owners foster conflict.
Even if other employees are paid according to scale, employed family members may be promised an equal wage, regardless of the contribution made - with the family business operating like an island of socialism in the high seas of a capitalist economy. Equal compensation for unequal responsibilities can trigger resentment, or a lack of motivation. Rewarding superior performance can take the business to the next level, especially in a challenging market.
The truth remains: "Equal isn't always fair." (see also Ellen Frankenberg's other column by that title. )
Family businesses are not churches.
The Pope and other religious leaders are ordained for life. U.S. federal judges are also appointed for life, and so are most family business successors. Lifelong tenure in a rapidly cycling business environment can contribute to hesitation in selecting successors, and lethargy in the latter years of each generation. What if Tom, now a young 26, does get his act together, by the time he's 35? What if the business environment shifts, requiring a different kind of leadership? What if the younger siblings get tired of taking orders from the older sister who always was "a little bossy"?
Why not develop a term of office, for 5 or 10 years, with annual reviews, comparable to those used to review CEOs in the best run U.S. corporations?
If Jim is appointed President at 33 when Dad is 55, and ready for the warmth of Arizona, why not offer Jim a ten year challenge, to see where he can lead the company within that time frame? Time limits can lead to more strategic initiatives in the successor generation. Term limits can motivate the younger sibs because they too can someday be president.
Family businesses are not banks.
Some families depend on the business to lease their automobiles, to fund their children's education, to provide down payments for their homes, to sustain a life style beyond what they could afford in the open market, and to deliver private investment opportunities that few of their peers enjoy.
All these financial arrangements may be legal and advantageous, but in a tough economy, reserves become limited, and expectations need to be scaled back. The company may not be able to sustain such liquidity indefinitely. Some families even sell the "Golden Goose" at the wrong time, for the wrong price, because immediate cash looks better than reinvesting in an enterprise that could sustain the whole family for generations.
Especially if several family members reach retirement age, and want to redeem their stock at about the same time, or others decide to leave the company to fund other agendas, the company may become strapped for funds. Buy-outs need to be carefully structured to protect the welfare of the company first of all, because the whole family is "banking" on it.
In a positive way, some families use the business like a savings bank by making a commitment to reinvest the first 10% or 20% of profits each year back in the business or its real estate holdings, before distributions to family shareholders are made.
The saying, "Shirtsleeves to shirtsleeves in three generations" remains a universal adage: "Clogs to clogs…" "Rice paddies to rice paddies…" "Kimonos to kimonas..." all tell the same story: one generation founds the business, the second enjoys a comfortable lifestyle, and the third can make a run on the "bank", rather than continue to reinvest in the business.
Family businesses are not immortal.
Some founders are motivated to build a business that it will outlive them, and carry their legacy into future generations. Some founders even expect their successors to carry on the business exactly the way they did it.
Given the 20-25 year cycle of most businesses, each generation needs to reinvent the business, adapting to new market conditions, new technology, and the talents of a new constellation of leaders. Taking over an established business requires a totally different skill set than starting one from scratch.
Sometimes, like another child leaving home, founders need to let go of a business, so it can develop in new directions. Sometimes the next generation needs to continue to capitalize on the experience of the previous generation, perhaps through quarterly board meetings, focused on the strategic development of the business.
Both generations need to recognize that the 9% of family businesses that survive the critical third generation continue to generate new strategies, new competencies, and sometimes a whole new life cycle.
Successful family businesses do best when they discover how to translate the original vision of a founding entrepreneur to a collaborative partnership that capitalizes on those competencies that can propel them into the future. In practical terms, this means they will:
- Select the most competent successor available, within the family or beyond it, if necessary.
- Develop a philosophy of compensation that reflects the market value of individual and team contributions.
- Define practical time frames for developing accountability within successors, especially sibling or cousin partners.
- Manage financial assets with the future of the business as a priority.
- Continually reinvent the company, with new strategic initiatives, and innovations at least as creative as the founder's original vision.