A dual initiative that can help a business family ensure continuity of ownership control and harmonious family relationships.

Most people have a pretty straightforward vision of the perfect family business. They hope for a continual strengthening of the company’s financial and market position so it can support the lifestyle needs of family members, from generation to generation. They also wish for family harmony.

But life gets in the way. Sometimes family members’ short-term or individual needs can overwhelm the needs of the business. In other cases, family members disagree strongly on the strategic direction, or even on the day-to-day management, of the business. These issues can seem insurmountable. As an unfortunate consequence — almost by default — many families end up in one of two places:

  1. They sell out and create a pool of financial assets, infinitely divisible and generally free from controversy among family members. Those family members who are astute financially may thrive. Others may dissipate their assets quickly. But the family legacy is gone forever.
  2. They devolve into a “lifestyle company,” in which all decisions are driven by the requirement to provide for the family’s lifestyle needs. Like selling out, this alternative is a terminal position. Unless a business continually strives to build as strong a competitive position as possible in its core marketplace, it will wither and die, much to the detriment of the lifestyle it was meant to support.

Building a Healthy Future

How does a family resolve this disconnect between vision and reality? To reclaim a healthy future for both business and family, a family ownership group must create and implement two plans: a continuity plan for the family, and a strategic plan for the business.

Continuity plan. This plan lays out how the family will structure its ownership of the enterprise, govern and/or manage it, and distribute the benefits of ownership among family members. This effort involves communication among the family to identify and resolve causes of discord and to conduct financial, tax and estate planning; corporate and family governance; and corporate organizational development.

Strategic plan. This plan defines what the enterprise and the family must do to succeed in building the strongest possible market and financial position and meet the company’s human and financial resource requirements. This effort is critical because the business must be successful in order for the family to attain its own goals. Most crucially, it draws on the continuity plan to define the roles of family members in the strategic operation and direction of the business.

Creating both plans involves intensive work with, and within, the family — and can feel like a tall order. For example, where and how does one start? The solution to this puzzle lies in determining where the most smoke and fire is coming from. If it’s from disagreements about family needs and aspirations, the family should start with the continuity plan and fold in the strategic plan as they get a handle on the interpersonal conflicts. If there are bitter disputes about the strategic direction and management of the family enterprise, they should start with the strategic plan, recognizing that the continuity plan must parallel the development of business strategy. Both plans are needed, but begin by trying to put out the biggest fire first.

These two plans are developed through different processes and have different content. Their common denominator is that if the effort to realize a vision of a familycontrolled enterprise is to succeed, both management and family shareholders must understand how the two plans were developed, believe in the correctness of the decisions reached and commit themselves to their execution. To achieve understanding, belief and commitment, key members of management and the family must participate directly and intensively in the development of both plans.

Commitment Through Participation

Experience shows that neither plan should be developed primarily by outsiders and “delivered” to the owners and managers. No matter how sophisticated these “outside” plans may be, they soon will become very expensive books sitting on a shelf unless understanding, belief and commitment to these plans have been achieved by both the family owners and the entire management team. This requires direct and intensive participation in the development of both plans. That being said, experienced professionals can address resistance and ongoing family tensions and can help by directing the planning process.

The result of this complex, difficult and time-consuming effort is what we call a “family-controlled enterprise,” one marked by continual strengthening of both the family’s business and family relationships. The constant among these families is that they maintain absolute ownership control and strive to have best practices drive their decision-making. This provides continuity of family control; economic vigor for the company; and harmony and good relationships both within the family and with managers, directors, employees, customers and the community.

Continuity planning is an important indicator of a company’s long-term competitive strength and of the family’s courage and persistence. It sends a message that the family has committed the emotional and financial resources necessary to position the company for future growth. Business analysts are as keenly aware of signals denoting growth and productivity as they are of red flags.

Continuity vs. Succession

A continuity plan is not a succession plan. Succession plans are what all companies — family and non-family — undertake to ensure a smooth transition in the senior management ranks. But in family firms the term “succession” sends the message that the senior generation is to be ousted in favor of a younger, perhaps untried, management team. The real goals of planning are continuity of family control, business vitality and family harmony.

Continuity plans expressly assume gradual changes in authority — not merely in management, but also in ownership and governance. Regarding strategic planning for family-controlled enterprises, we have a very clear philosophy:

  • Concentrate on one or more natural markets in which the company can marshal the necessary resources to make winning as likely as possible, and in which winning is worthwhile.
  • The process must be rigorous, disciplined, scientifically grounded, fact-based and driven by best practices toward clear objectives and goals.
  • The process should be open and inclusive to stimulate broad discussion of the alternatives and resolve any disagreement through objective analysis.
  • Implementation should focus on aggressively executing strategies in the market or markets in which the company has the best opportunity to win, with the resources required to succeed.

A Success Story

Here’s how the process worked for one business family, the Millers (a pseudonym). The Miller family’s second and third generations were managing a diverse set of manufacturing and service businesses. Over time profitability had been slipping, even though sales were increasing. About half the family members were employed in the family enterprises. There was substantial discord brought about by dissent from the “outs” because of lack of suitable job opportunities and the decreasing payouts necessitated by declining profits. The company did not have a strong enough cash flow to support operations and even modest growth, so debt was edging upward. With that came the need for larger personal guarantees by the family owners of the company’s bank debt.

The Millers engaged us to help them resolve a number of severe interpersonal conflicts and to assist in developing financial and estate planning as well as approaches to corporate and family governance. It quickly became apparent that a significant source of discord was the financial exposure of the second generation due to poor business performance. Thus, it was advisable to start with a strategic planning effort.

The poor financial performance resulted from trying to do too many things without concentrating enough resources to get any of them done well. There were too many “hobby” businesses in the portfolio that matched the interests of one or more family members, but these had no chance of creating a winning position in the marketplace. The portfolio was winnowed down to the three business units that had a reasonable chance of winning in attractive markets. However, the resource requirements necessary to fully implement the winning strategies were greater than the family could generate internally without ceding control to outsiders, so the list was further narrowed to the two businesses that had the best chance of winning great rewards.

The rest of the portfolio was sold off, and in one instance closed down at minimal cost. Debt was substantially reduced, and lines of credit were put in place to finance future growth. Continuity planning could then proceed. Corporate governance became much clearer, as what was to be governed became self-evident. Organizational development also could become targeted, as certain family members were put on long-term personal development programs, both inside and outside the company, to be groomed as the next generation of top management. Others, with varied interests, would be trained to be informed and competent directors or committee members while pursuing outside careers.

Recognizing the Real Goal

In a family enterprise, power, money and control must be allocated. Conflict about how they are allocated is the natural human condition, and wishing for the conflict to end will never resolve the real need for this to be determined. The existence of such problems is normal.

What is required is a commitment to discuss and plan the resolution of these issues. With professional assistance, most family shareholder groups can do so, once they understand the goal is continuity and not succession.

Richard L. Narva is Senior Advisor and Founder of Narva & Company, LLC, Advisors to Family Enterprise. Dr. Peter von Braun is a professional strategist, business owner, and former partner at McKinsey & Co. (Reprinted with the permission of “Family Business” Magazine, where this article first appeared in a slightly different format).

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