Family business continuity: A well-oiled machine

by carly_midgley | February 22, 2018 9:58 am

By Danielle Walsh

[1]

Overcoming negative trends in family business succession is only possible if attention is paid to the many moving parts inherent in running a business as a family. This article, the second in a two-part series, delves into each of these items and the considerations that must be made to ensure they work cohesively.

Family business rules

Family business rules support the guiding principles (discussed further in part one of this series) and provide additional details and process. They should be communicated to the entire family, including spouses and children, at least once a year. This ensures members of the next generation, as well as all family members, are aware of what the family business expects from them and what they can expect from the family business. For instance, it clarifies what kind of experience or education they are expected to have to enter the business, as well as who can own shares and how they will be obtained. In other words, family members of the next generation now have a clear picture allowing them to make informed decisions about their future in the family business.

Shareholders’ agreement

A comprehensive shareholders’ agreement addressing all management and ownership succession issues is a key outcome of an effective succession plan. Unfortunately, too many family businesses still don’t have such an agreement, which results in family conflict that would be avoidable if one was in place.

When families do have a shareholders’ agreement, it is typically missing key elements such as the terms and conditions of each potential exit (e.g. death, incapacity, voluntary exit, and retirement). The manner in which the value of the business is determined when triggered by an exit, as well as the timeframe over which it will be paid, are two more issues that cause family businesses much grief and can even result in one family member suing another. A comprehensive shareholders’ agreement will go a long way in reducing or, better yet, eliminating conflict within the family while providing the necessary roadmap for the integration of future generations.

Employment contracts for family members

[2]

Clearly outlining the terms and conditions of a family member’s employment in the business is an important aspect in discouraging the notion of entitlement. This also helps minimize conflict amongst siblings or cousins working in the business together. If all family members understand how compensation is determined, what their roles and responsibilities are, and where they sit in the organizational chart, it is much easier for them to work together. A probationary period should also be applied to family members, as it is important to ensure they are compatible with those they work with. The damage caused by firing a family member or keeping one who isn’t competent can be significant. Using a probation period (as with non-family employees) can help avoid these types of situations.

Service contracts for retired owners

It is common for a family member who has retired from ownership to want to continue working on a full- or part-time basis. If the terms and conditions of this arrangement aren’t clearly outlined and understood by all active family members, it can be difficult for the next generation to take the lead and manage the business. Roles and responsibilities need to be clear for the person retiring, as it can be difficult to scale back and stop being involved in day-to-day decisions. Having a contract that outlines timing, compensation, and duties can help facilitate this transition for everyone involved.

Dividend philosophy and policy

Without a clear dividend policy, the amount and timing of dividends can cause a lot of conflict, especially among siblings. This is typically not an issue while the founder is still alive, as he or she will dictate the dividend disbursement. This being said, having a formula or methodology predetermined to calculate the amount of dividends to be distributed can save family members from long and emotional disputes. This way, all shareholders can easily calculate the potential disbursement using the formula, which means they will have the same expectations.

Governance

Having terms of reference for each of the governance structures the business implements will help keep all family members clear on the goal, frequency, appropriate topics, and voting mechanisms relevant to each structure.

Family council should be held once a year with all family members, including spouses, in-laws, and children. The goal is to inform the broader family of how the business is doing and where it is headed, as well as to remind everyone of the opportunities available to them as outlined in the family business rules. The family council does not make decisions for the family business, but it can make recommendations for consideration by the business. This annual forum is also a great opportunity for larger families to connect or reconnect with one another.

Family business meetings are held during the succession process and as required thereafter amongst active family members. This forum is used to discuss family issues that affect the business, as well as business issues that impact the family, and to develop the guiding principles and family business rules before they are communicated with the broader family.

A board of directors (BOD) is the legal structure that governs all incorporated businesses. In most small to medium family businesses, a formal BOD is not implemented. Typically, the owner(s) will meet and make decisions as needed on an informal basis. A board of advisors (BOA) is another formal structure often used in small- to medium-sized businesses instead of a BOD. When you have outside board members on your BOD, they become accountable for your business and can be held liable in certain situations. Therefore, in order to avoid these issues, many family businesses opt for a BOA where they can get the outside advice without the issue of potential liability.

[3]

Another governing body to consider is a contingent board of advisors (CBOA). As the name implies, this board would only be used in certain predetermined situations (i.e. on a contingent basis). For example, it could be used to help the family determine who will lead the business upon the sudden death or incapacity of the current owner/leader. This strategy safeguards family harmony by preventing the decision from lying solely in the hands of family members who are not qualified or comfortable under the circumstances, thereby allowing independent and trusted individuals to make the determination. It is important to ensure all parties know who is on the CBOA, and that its members are aware and understand their roles and responsibilities.

Dispute resolution process

[4]

The purpose of a dispute resolution process (DRP) is to provide family members (active and non-active) with a forum to discuss and resolve conflict related to the family business. The nature of family business is such that family issues will impact the business and business issues will impact the family. Family conflict left unattended will negatively impact relationships, which in turn will negatively impact the business. Therefore, to promote harmony within the business and the family, a process to deal effectively with conflict is recommended.

Sibling code of conduct

Many families in business will implement a code of conduct outlining desired behaviours for siblings or cousins. This can include how to address one another in the workplace, how meetings will be handled amongst family members, and how issues will be dealt with. Having a formal code of conduct can help all family members behave in a manner that promotes and supports the family’s business and personal values.

Turning the tide

Each of the items discussed in this series plays an important part in helping family businesses to not only survive, but also thrive from one generation to the next. Successfully transitioning to the next generation requires not only the technical exercise (e.g. wills, tax planning, valuations), but also consideration of nontechnical aspects (getting the whole family to endorse a plan based on principles and rules that support their beliefs, values, and culture). Most families in business only have the technical aspect completed, which is the main reason negative family business statistics exist. If family businesses and their trusted advisors, such as lawyers and accountants, start placing as much emphasis on the family component as they do on the technical, there is no doubt we will see the statistics improve in the future.

Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate the rough waters of management and ownership succession. She is a certified public accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh is also president of the Ottawa chapter of the Family Enterprise Exchange. She developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached via e-mail at danielle@walshfbas.com.

Source URL: https://www.jewellerybusiness.com/features/family-business-continuity-well-oiled-machine/

---