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Family Business II: The Connection Has To Be Emotional, Not Just Financial |  November 15, 2016 (0 comments)

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In the November 10 edition, The Centurion Newsletter explored the topic of creating and engaging the next generation of a family business. This article continues with additional strategies to position a family business for success through both current and future generations.

Philadelphia, PA—For better or worse, 80% of U.S. businesses are family owned. The “better” part is that family businesses almost always outperform public companies over time, mainly because of a focus on long-term investment rather than quarterly returns. The “worse” is that the family itself—through conflict or incompetency—can take a business down faster than any external market challenges.

At a conference sponsored by the Initiative for Family Business & Entrepreneurship at the Haub School of Business at St. Joseph’s University in Philadelphia, PA, Meghan Juday, one of the Initiative’s directors and a fourth generation family business owner herself, pointed out that maximizing returns—both financial and emotional—for the family is essential to success.

“If family members are part of the business because of the returns the business provides but also they feel close to family members while they’re getting a dividend, now you’re creating a compelling environment for engagement. But if you’re just there for the money, why not sell [your interest] and invest the money?

“You have to make sure every time you’re interacting with your family and the family interacts with the company, you're creating a compelling story that gets people excited and energized.”

Meghan Juday, a fourth-generation family business owner and expert on creating engagement with multiple generations.

Juday suggests a family task force is one of the best ways to create an environment that fosters emotional connection to the business, and the first imperative is openness and transparency. “Decisions you make around the intersection of family and company can't ever give the impression that backroom deals are going on.  You’re really creating an inclusive decision-making environment with a task force. If the task force is addressing employment policy, that's something you draft together.”

New ideas are critical for a successful task force. Family members probably know how each other reacts to ideas, but it becomes very difficult for families to make informed decisions if they’re continually rehashing old ideas. “For example, if you need to write employment policy for the family, it’s important to come to a place like St Joe’s and see sample policies, or ask peer family business owners how they do theirs. The research process can take a while, but it’s worth it and it’s important to infuse your system with new ideas before you make decisions,” emphasized Juday.

Lastly, when the task force makes a recommendation back to the family, it needs to provide plenty of opportunities for feedback. It sounds obvious, says Juday, but many don’t give it nearly enough time or emphasis. “For us it takes months, because there are 50 family members, but it’s worth the time,” she stressed.

Getting the next generation ready. If the family isn’t ready to step up to new challenges in the market, it will drag the business down. Juday says it’s surprisingly common for family businesses to outgrow the family’s abilities. In the jewelry industry, a ready example is migrating from bricks-and-mortar to digital retail. Even without generational conflict, not every jeweler has the skills in the family to successfully transition to omnichannel retailing.

“Education for the next generation should be framed not around what you need today but the future,” says Juday. “By the time you get everybody framed around what need today it's obsolete. Think about the landscape of family, business, board, and market over the next 10 years, and think what skills and capabilities you need to meet challenges over 10 years.”

Key elements for ensuring the right kind of education include focusing not only on creating readiness of the whole family but also on individuals who want to take on leadership positions.

“If you have four family members in the business and your father may retire in the next 10 to 15 years, you want to talk now about what skills and competencies are needed to be a family leader, to give people plenty of time to meet the competencies before you have to make a selection process. You don't want to get to the point where someone is named and everybody's surprised.”

Juday described a family that owned several successful businesses and had three children that all wanted to be CEO. But the father didn’t want to choose between them, so he sold the company instead.

“The chance of all three really being qualified was low, and probably there was only one who was. Had they worked over the years to settle who would do what, they wouldn't have had to sell. It’s more fun to manage a business than to manage money.”

To develop a plan, first determine what roles you need to have people ready for, both in the business and on the board if you have one. “If you know what the roles are, you can build competencies and have fair chance to achieve them,” says Juday.

Building the right competencies can be achieved through individual development plans that include any appropriate formal education as well as things like coaches and mentoring.

Juday has a competency list for every role at her family’s company, Ideal Industries. Because family members now have said they want to be family directors, she worked with a development expert to put together a program to help them achieve the skills needed.

Of course, this all requires tangible investment. Juday’s family allocates 2% of its business dividends toward education, but that isn’t a hard and fast formula.

Going beyond the family. Sometimes there’s simply no family member available to take over. It’s ok to have a business that is owned by the family and run by nonfamily. In that case, the family often will create a board, rather than serve as day-to-day managers. But it’s still essential to have the right competencies on the board, as well as for the outside managers running the business.

“Every family member on the Ideal board has to be highly qualified and capable, not just because they have right last name,” says Juday. “We have a lot of talent in the family and we want to bring that in, but not take unfair advantage.”

Make sure that at every turn, you are providing opportunities for the next generation to contribute in a meaningful way, such as summer jobs, internships, contributing to meetings, and so forth. Find a way for everyone to contribute without having to go to the office or the store every day. But if after all avenues are exhausted, there’s still nobody ready to step up and take over, it might be time to exit—something the jewelry industry has seen with a number of top independents choosing to close successful stores.

Robert Louis, an attorney with the Saul Ewing law firm in Philadelphia, says, “Not having a family business is not a failure, it’s a decision.”

Should it come to that, the business’s assets also don’t need to be divided equally between the children if they’re not contributing equally.

“Fair and equal are not the same thing,” Louis says. But that’s a whole other issue to be examined in a future installment.

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