Statistics show that the family enterprise is the most common form of business ownership in the world. In Europe and Asia some businesses have been family owned for 10+ generations, or several hundred years. In Canada, it is estimated that some 60% of the GDP is driven by family enterprises that employ more than six million people. Ironically research on family business has only gained significant traction over the past 50 years.
Families that are in business together often feel isolated by the challenges of working in such a unique and personal environment. In reality, many families face the same complications regardless of the industry they operate in or the size of their business.
Here are five common family enterprise challenges that with consistent effort and dedication can be overcome:
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Limited Capital. Just like non-family companies, family businesses must satisfy shareholders’ expectations. Occasionally, a family member may want to leave the business and be bought out of their ownership position. Family members are often motivated to avoid conflict and may be more willing to pay out capital that would otherwise be used for company growth.Additionally, as the family business grows across generations, successors sometimes become accustomed to a very comfortable standard of living. The business that previously supported just the founder’s family must now support multiple families, their siblings or even cousin owners.
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Lack of Preparation for the Next-Generation Leadership. In many cases, no family heir or successor is interested or qualified to lead the family business, and sometimes that is simply because the founder has not effectively prepared them for the challenge. Following in the footsteps of a very successful parent can be an intimidating prospect.
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Inflexibility and Resistance to Change. What made the business successful in the past can sometimes get in the way of the company’s future. By nature, successful business leaders tend to be remarkably driven and committed to their ideas, which may make them inflexible and stifle growth. The leader needs to be open to new ideas from the next generation, as the requirements for success can change over time and the newcomers will typically have very different working styles from their predecessors.
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Sibling Successor Conflict. Children of family business founders usually grow up observing their business leader parent’s leadership style as a benevolent omnipresent personality that knew every aspect of the business and; as a result, they will try to emulate that leadership style. When sibling behavior patterns that began in childhood are brought into the boardroom, things can get even more complicated. However, moving to a sibling leadership model requires a different leadership style that is more inclusive and consensus building.
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Disparate Family Goals. As families grow and become older, their goals and values often evolve and become far more diverse. One family member may want to build the business for future generations while others may want to harvest the existing equity. Cousins who grew up in different households will usually share some values while being very different in many other respects (race, religion, political views, etc.). Managing these different goals and values can be a significant challenge.
While there is no one secret formula to successfully navigate a family enterprise through the numerous family and business issues that will arise, there are best practices that help families deal with issues relating to the family business as they come up.
The Three-Circle Model of the Family Business System, pictured below, can help to understand the interrelationships present in a family enterprise. Each circle is a separate system; however, within a family enterprise they will overlap. To be successful, each system must have its own governance, goals and objectives, and each must be aware of the adjacent system in order for success to be achieved.
Ownership Circle – Board of Directors/Advisors
The CEO of the business reports to the board and the board reports to the shareholders. By having a diverse and complementary board the business benefits by having a clear and well thought out strategy, depth of experience for guidance and a reporting methodology. The board would hold the CEO responsible for implementation of strategy and management of the business.
Business Circle - Strategic Plan
The process of creating the strategic plan best prepares management to see issues as they arise and respond in the best fashion. The process of planning is invaluable because it allows the management team to focus on the business’ strengths, weaknesses, opportunities and threats.
Family Circle - Family Councils
A family council allows the family to meet regularly to talk and discuss their needs. Family unity can be achieved in many ways, but to ensure full and open communication the family should establish its own constitution, councils and regular meetings.
Seek Advice
When these complications and challenges are managed well, family companies can have tremendous advantages over non-family businesses. This article is intended to be very general in nature. It is important to consult with professional advisors who understand the unique complexities of a family enterprise. If you find yourself in this situation, your BMO financial professional can refer you to our team of Business Advisory and Succession Planning consultants to assist you in monitoring and reviewing the plan regularly to ensure you remain on course to meeting your family’s goals and objectives.
For more information, please contact your BMO financial professional.
Information contained in this publication is based on sources such as issuer reports, statistical services and industry communications, which we believe are reliable but are not represented as accurate or complete. Opinions expressed in this publication are current opinions only and are subject to change. BMO Private Wealth accepts no liability whatsoever for any loss arising from any use of this commentary or its contents. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice, tax advice, a recommendation to enter into any transaction or an assurance or guarantee as to the expected results of any transaction.
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