An article in the Globe and Mail by Wallace Immen; “Getting serious about succession” discusses the difficulties faced by many businesses in ensuring there is a process in place to groom future leaders of the company.
What about entrepreneurs? It’s not that simple when leadership also involves owning the company!
Recently, McKinsey Quarterly published an article, “The five attributes of enduring family businesses”; which describes the succession pitfalls faced, specifically, by family businesses. According to research, ”less than 30 percent of family businesses survive into the third generation of family ownership. Those that do, however, tend to perform well over time compared with their corporate peers”.
The article is 10 pages long so I’ve summarized what I think are the most salient points:
Family
• Establish a strong sense of purpose and ownership.
• Develop rules for when and how a family member joins the business.
• Implement a family forum or office for decision making and education
Ownership
• Regulate ownership through shareholder agreements that can last 15 to 20 years.
• Restrict the trading of shares.
• Develop long term payout policies to avoid decapitalizing the business.
Governance
• Maintain a strong family presence on the board.
• Stay involved in top-executive matters and manage the business actively.
• Position the company for long-term growth and performance. Avoid the temptation of short-term performance at the expense of long-term health.
Wealth Management
• Families need strong capabilities for managing their wealth. Diversifying risk through liquid assets and semi liquid assets (hedge funds or private equity) helps reduce the risk of concentrating wealth in one company and provides a source of cash and liquidity.
• It’s important to have or hire a professional organization with strong, consolidated, and rigorous risk management to oversee the wealth family businesses generate.
Foundations
• Charity helps keep families committed to the business, providing jobs to those who don’t work in it and promoting family values as the generations come and go.
• Involve family members with charities that are important to them.
• Evaluate the impact of your philanthropic initiatives.
Entrepreneurs often have difficulty letting go and their offspring often don’t feel qualified or have the desire to be involved in the business. Establishing a sense of purpose and commitment amongst the next generation is key to ensuring the business and the family continues to thrive.
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