As a family business grows and family members mature, family dynamics and the decision-making process can become complicated and challenging. Competing and oftentimes overlapping interests foster an environment rife with conflict. The senior generation might be risk-adverse and desires the status quo whereas the second generation is risk-tolerant and wants outsized growth. During business transitions, family and business relationships can become particularly strained as individual roles evolve and lines of authority blur.
While most families value unity and relationships over wealth and accumulation, few have taken the steps needed to protect what they value most. They fail to embrace the principles of Family Governance by defining a purpose for the family wealth, crafting a long-term strategy and forming a unified team to execute the plan over a multi-year period. This is in large part why more than 70 percent of first family generation transitions fail and are unable to preserve family wealth beyond the second generation.
Successful corporations embody the fundamental planning elements of business strategy, corporate values and vision. These principles align and unify employees and establish the basis for key decisions about the allocation of human and capital resources. If these planning approaches are essential to the long-term success of most organizations then why haven’t the majority of family business owners embraced these concepts in their transition or legacy planning?
“In my 25 years of family business experience this phenomenon is largely due to owners wanting to keep business matters separate from family matters – and that structure is not necessary,” said Donald Bielen, principal at Perkins & Co. “Family, like a business, is a living, breathing organism that requires constant change, maintenance and adaptation. “If the strategies used by businesses are applied to the family unit, a case can be made that the family can derive similar benefits to those realized by a business, hence family governance.”
What is Family Governance?
Family governance is a process of organized family communications and planning that encourages family connectivity, collaboration and continuity. When a family group defines their core values, future vision and culture, they are better equipped to navigate complex challenges related to business, financial and legacy planning. Family governance effectively serves as a blueprint to balance the family members’ goals and objectives concerning the transition and succession of the family’s assets.
Take, for example, an active family-owner who prefers to reinvest profits to fund growth while a non-active member desires personal cash flow. Another example could include active senior family members who share ownership with all family members while the active children want to concentrate ownership.
“Each generation may have a disparate long-term vision and purpose for family wealth,” said Bielen. “Family governance systematically addresses these divergent interests by creating a customized strategy to accommodate the individuals’ respective roles and maintain long-term personal and business relationships.”
Strategies to manage family wealth
Family business strategy is not too dissimilar from corporate business strategy in its core principles. With the appropriate guidance, families can “defy the odds” by creating an “end game” for their business and wealth. There are three basic strategies – with meaningfully different outcomes – to manage and preserve wealth: Division, Preservation and Growth. They include:
- Division is the outright allocation and distribution of assets to the next generation without any restriction, requirements or controls. This strategy requires limited financial and management skills and typically results in the consumption of the family wealth by the successor generations.
- Preservation (most common) is designed to extend family wealth with modest growth until consumption by an increasing number of heirs becomes unsustainable.
- Growth requires pooling assets and demands a higher degree of skills and capabilities by heirs. This strategy increases the likelihood of perpetuating generational wealth through outsized growth.
Each strategy requires advance planning and coordination with differing skills and capabilities. Each results in meaningfully different outcomes in terms of family relationships and wealth preservation. Determining an “end game” early based on a heightened awareness of the options will have a meaningful impact on the end result.
Move forward together
At its core, the family governance process defines stakeholder roles, responsibilities and relationships on a long-term basis to accomplish a predetermined set of goals and objectives. Its communication process, tools and philosophies create a foundation for preserving and perpetuating family wealth and relationships for multiple generations.
According to an African proverb: “If you want to go fast, go alone. If you want to go far, go together.” In family business succession and transition, together is the way to go.
Donald Bielen is a principal at Perkins & Co, managing business transition and succession planning strategies for larger privately-held business owners and their families. He can be reached at 503-221-7545 or firstname.lastname@example.org.