Dear family business owner(s): “Can you paint a clear picture of the employment, management and ownership opportunities in your business for the next 50 years?”
Most family businesses are plagued with unknowns. The current and future owners (successors) have unanswered questions that can challenge their day-to-day work. For example, will I ever get to be a manager or owner in the family business and, if so, when? How will my ownership be funded? Will I have to share ownership with my non-active siblings? These questions need to be answered to paint a clear picture and minimize conflict.
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Conflict in the family due to the business is usually because of differing expectations. When certain topics are avoided, the likelihood of varying expectations or opinions increases—as does the likelihood of conflict. Owners have an obligation to address these tough questions before it’s too late.
Establish a set of family rules
If you create a set of Family Business Rules that stipulate the qualifications to be an employee along with the criteria to be management and ownership, the next generation will know what is expected of them. For instance, many families stipulate that only direct descendants of the founders can own shares of the company. This establishes a clear pool of potential owners while dealing with the sensitive issue of spouses, in-laws and employees becoming owners. Furthermore, some families insist that any family member aspiring to be management must have a certain number of years of external work experience as well as a certain level of education. This ensures that family members that make it to management are competent.
Additionally, for family members who have made it into management and aspire to ownership, the Family Business Rules often require they have at least 10 years of full-time experience in the company, with five years in management. This ensures that those entering the ranks of ownership have earned it. It also means that only those that work in the business will be owners.
Another rule family businesses often implement is the purchase of the business at fair market value by the next generation successor(s). This is an important consideration when there is more than one sibling and not all siblings are active in the business. It ensures that no sibling(s) has been privileged, safeguarding family harmony.
The rules will differ from family to family but their purpose is to minimize conflict by outlining what is expected and required. The rules should be communicated to the broader family (active and non-active in the business) so there is a common understanding among all.
By establishing and applying a set of Family Business Rules, owners can paint a clear picture for generations to come with respect to employment, management and ownership opportunities, increasing the likelihood of long-term success. Talk to your family business advisor about developing your Family Business Rules today so you can set your family up for years of success.