The truth is many businesses have family members working inside the company. Does that make the company a ‘family business’?
There are many studies that show that family businesses go the way of the dodo bird after the second and third generation.
Over the years, we’ve worked with many business owners who happen to have hired family members.
We suggest to all our clients they make a clear distinction: it doesn’t matter if there is family inside the business or not, the same rules of organization and business processes apply if the owners expect to grow the company so they get a return on their investment from the sale of their asset.
Yes, the company is an asset. It is a separate entity. Yes, it has been built on your blood, sweat, tears and creativity.
But like your child, your business will grow up and be on its own one day… or shrink back into obscurity.
You, as the parent of this business have to make the choice to prepare that company to stand on it’s own value. If you continue to make the business dependent on you, it’s like having an adult child without the skills to support him or herself.
And so we suggest to all our clients to stop thinking that just because the business has family, doesn’t mean the laws of what makes a successful stand alone saleable enterprise any different.
With clients that we have worked with, it is the staff and then the family that have the greatest challenge inside a family enterprise when the following agreements and processes have NOT been made:
These are the 8 Ways to Escape Family Business failure rates and Increase the Probability that you, your family, your employees and your business win big and are taken care of in the best way possible.
1. CLARITY Clear job descriptions for all staff with roles, accountability, authority and responsibility.
2. NO FAVOURITISM Every job is posted internally and externally.
3. BEST FIT FOR THE ROLE The best person is selected for the job after several rounds of interviews.
4. NO INTERFERING WITH REPORTING LINES Any family member who is selected for a job has a direct report that is not the parent. The reporting lines are respected.
5. PREPARE THE COMPANY SO IT’S TRANSFERRABLE AND SALEABLE LONG BEFORE When the owner is considering exit options, he/she prepares the company 2-4 years before the desired exit date so that it is transferrable to the next owner, who is the ideal buyer.
6. SELL TO THE BUYER WHO WANTS IT The owner considers that selling the business to the off spring is only the right thing to do when the child has expressed desire and interest and is prepared to make an arms length offer.
7. THE ONLY WAY TO TRANSFER WEALTH IS TO CAPTURE IT THROUGH A SALE. A SALEABLE COMPANY IS REQUIRED. When the owner remembers that by selling the business to a non-family member that the proceeds of the sale will eventually go to the child through the estate process anyway, so don’t worry if the child is not interested. And don’t wait until they become interested one day, before starting to make the company saleable and transferrable. Remember the asset is melting until the day an interested and able buyer acquires the firm. If the business has not been made saleable and transferrable it is very hard for any buyer, family or otherwise to build the company further. So that wealth withers.
8. A BUSINESS HAS TO BE MANAGED TO GROW VALUE. When the owner remembers that just because family happen to work in the business it doesn’t mean that family gets special treatment or that the company doesn’t have to run by the same rules, procedures and systems as any other business. An asset that isn’t groomed for transfer melts away and the value isn’t captured. It doesn’t matter who owns it. So if legacy is important to that owner, the big message is, care for it and prepare it so it saleable and for when the owner doesn’t run it anymore.
As the employee of one ‘family business’ who reported to the daughter of the owner said:
“She has never done the role she was given. She was not told she needs mentoring. So when I tell her how we need this department to run so that we can win more work and keep the clients we have, she take’s offence. I tried to tell her Dad, but he doesn’t like to take feedback about his daughter. So since I can’t get my job done properly, and she won’t learn and our customers are upset (ok, he used stronger language here) when I don’t show up with the right equipment to do what they are expecting because of what she didn’t prepare in advance, then I look bad. Why should I invest my 20 years of experience in a company with owners that are invested in looking bad to their customers so they can look good to each other?”
What do you do inside your (family) business to escape melting value to avoid becoming just another statistic? Share your strategies here.