As your family business has expanded from a small entrepreneurial start-up into a thriving enterprise, your thoughts are no doubt turning to leaving a legacy for future generations. Running a family business has always been tough – in fact, less than 30% of family-owned businesses survive long enough for the second generation to take over and just 10% for the third generation.
So, if you wish for your family to retain control once you’re gone, best familiarize yourself with the risks affecting family business ownership… Many family businesses ignore corporate governance at their peril.
Corporate governance – the system of rules, practices and processes by which a company is directed and controlled – is made all the more complex when one takes family politics into account.
Transparency in matters of business
A lack of business transparency or clarity with regards to business issues can lead family members to experience a loss of control over business matters – that’s why it’s crucial to host regular family meetings, councils and assemblies. These are formal forums where all family members can be informed of the latest events, discuss business and family issues, and how the latter are impacting on the former.
Disagreements and conflict, like sibling rivalry or envy, between family members can not only make life unpleasant for all concerned, but is a serious threat to business success – and can even bring about the complete downfall of a family business. Such conflict ultimately has its roots in a sense of a loss of control – someone feels they’re losing out to the benefit of another.
Family businesses should have conflict resolution procedures in place to manage family conflicts – either via family meetings or family assembly, or even through objective outside mediators.
A platform to participate
A family business necessarily involves two symbiotic elements – business and family. Treating the two as separate entities can be harmful, particularly if certain quarters feel excluded from decision-making processes.
Whether they play an active role or not, all family members are stakeholders in the family business. Again, family assembly plays a pivotal role in ensuring that all family members have a platform to participate in family business matters and to decide how best to represent family interests going forwards.
Succession planning
Succession planning isn’t always as easy as handing over the reins to the eldest child –perhaps that child elects not to go into the family business, choosing another career path; perhaps he or she isn’t up to the job; or perhaps an outsider comes along who outshines all others. Warning: proceed cautiously.
Choosing a successor to assume the mantle of leadership can lead to squabbles and rifts as one family member senses losing control as another gains it. Whilst succession is an emotional transition, don’t lose sight of the fact that it’s a business transition, too.
Family business owners should ensure that they’ve chosen the appropriate business structure for protecting ownership – including ensuring that a solid handover plan is in place which correctly deals with all legal and tax implications of succession.
Exit strategy
Whilst an exit plan is a proactive form of succession planning, not enough family business owners give developing an exit plan serious enough thought. Having such a plan in place for your departure will give you more control over when and where it happens – in so doing, increasing the chances of the family business successfully negotiating the transition to next-generation control and remaining under family ownership.
Importantly, an exit strategy needs to properly address estate planning – including ensuring there is liquidity to pay estate and other taxes upon your handover or demise and facilitating family control over assets and investments, as well as ongoing wealth accumulation.
Extracted from www.kpmgfamilybusiness.com
