How to Future Proof your Family Business

article by: Kathryn Horsley at: 1st May 2017 under: Blog

The three generations phenomenon has long been a conventional piece of wisdom about family businesses and indeed wealth. The saying states, that the first generation creates the wealth, the second generation maintains the wealth, and the third generation fails to pass the wealth on to the fourth generation.

Records support this wisdom, showing that only 12% of businesses reach the 3rd generation and a meagre 3% reach the 4th generation.

Legacy planning can ensure that your family does not succumb to this rule and that your wealth is secure for many generations to come.

Family Governance

Family governance is a process or structure to educate and facilitate communication between family members. It also provides a forum for constructive discussion, problem solving and decisions about the family as it relates to the business, as well as, how the business relates to the family.

Another rule of three, is the Three-Circle Model of the Family Business System (Figure 1) that was developed at Harvard Business School in 1982 and continues to be the central organizing framework for understanding family business systems. The diagram represents three interdependent and overlapping systems in a family enterprise: family, ownership and business. For a family business to function effectively over time, each system must understand how to interact with and support the other systems. In addition, people within each system should appreciate which decisions are theirs to make. This interaction, support and decision making is governance.

There are three main components to family governance:

Family AGM: an annual meeting for all family members.
Family Council Meetings: for those families that benefit from a representative group of their members doing planning, creating policies, and strengthening business-family communication and bond.
Family Charter: a document stating a written agreement between the family members regarding all business related issues. Each charter is different, but generally should cover: ownership, voting/control, management structure and roles, vision/mission, business objectives and guidelines.

Why some family businesses fail to implement proper governance:

The vast majority of companies in the Middle East and Africa region are in their second generation of owners and are having to address the issue of corporate governance, to ensure that their businesses survive into a third generation.

Nurturing these businesses and ensuring they survive, is no longer solely a family concern. Making up 80% of non-oil GDP, they play a major role in the economy, providing jobs, goods and liquidity, factors which are critical to national stability.

Family businesses that continue to prosper from one generation to the next do so because they have robust planning, strategies and clear governance. Some families have the wisdom and foresight to begin implementing a solid infrastructure before it’s needed, and others do so only at the last moment, to save the business falling apart. Either way, it is a process that must be done.

There are many reasons that family members shy away from business formalities, the most common reasons are:

Fear of change: individuals are worried about what they will lose if tighter family governance controls are implemented.
Lack of knowledge: for members of a family that do not know how to begin implementing a family charter, the process can appear incredibly daunting.
Internal family conflicts: it is difficult for a family to unite, when members are struggling to even find common ground.
Nepotism: family members who have not earned their position on merit may fear losing it.

The most successful family businesses look to a professional family legacy manager for these very reasons. A family legacy advisor has the knowledge and experience to make implementing family governance a seamless process. Additionally, as an independent third party, they are able to make unbiased decisions that may be difficult for the family to make internally.

How you can ensure your family business survives into the next generation?:

Start before you need to: don’t wait until the business is in crisis before addressing the problems. Part of proper family governance is ‘worst case scenario’ planning. Your family charter should include contingency plans and provisions. For example: What should happen if a key member of the business dies suddenly in a car crash?
Seek professional guidance: it can be challenging for family businesses to be fully objective. An experienced legacy advisor, will be able to provide you with an independent appraisal of how the business needs to be structured for survival.
Trust the process: in order to receive maximum results, you must move past your fear of change and embrace family governance 100%. The hard work will pay enormous dividends and you will be rewarded with a family legacy to be proud of.

For a discussion on how you can protect your business legacy through many generations, contact:

Karim Ghandour: karim@legacyline.com

Marianne Saghbini: Marianne@legacyline.com

* Disclaimer: We have taken great care to ensure the accuracy of this communication. However, it is written in general terms and you should seek specific advice before taking any action. No responsibility can be taken for any loss arising from any action taken or refrained from on the basis of this communication.