Family-Owned Business in the Multiverse: A Path to Succession
STORY INLINE POST
In a family-run company, there are two connected universes that must operate in tandem: a personal universe encompassing family and emotional matters, and a corporate universe encompassing finances and business matters. Both universes must be accounted for from the start; if not, challenges will emerge from one of them, becoming a threat that will affect both business performance and work-life balance among family members. It is therefore vital to start making wise decisions before these situations arise. We at CleverBoD have outlined a roadmap presenting a dual solution to family business succession: one part for the emotional universe, and the other for the corporate universe.
Upon company establishment, there’s no differentiation between the two universes; the founder is both a person and a company. As the family grows and the company grows in profitability and complexity, challenges appear — a mixture of emotion and business that seem inseparable to the family immersed in the company's operations. In our experience, the best way to prevent these problems from arising is to separate the two universes and apply specific tools to address emotions and property in one and business challenges in the other.
The Emotional Universe
The founder’s first step should be defining the desired outcome in the emotional universe. Then, assess where you currently are: understand family relations and potential issues that might interfere with the business realm. It is also important to define family DNA in terms of values and aspirations for posterity. After the assessment, a family constitution must be put in writing. The roles of family members in the business must be clearly defined, including how the business will be governed by a board of directors and the rules for family members who are inactive in the company’s operations.
Once the constitution is complete, it must be communicated to all family members and be signed by all, whether or not they are currently active in the company. Further, a governing family council must be implemented. This council will oversee compliance with the constitution and determine the head of household in terms of business succession. The main function of the constitution and the council is to separate emotions and business succession from other company matters, with the ultimate goal being family harmony while everyone performs their agreed-upon responsibilities.
After the business has grown in assets, a family office is required to establish and manage guidelines for family decisions; for example, investment portfolios, real estate, personal security, health insurance costs, and family events to encourage harmony between generations. The family office is, at heart, the approved means of communication between the company and the family, and the best way to implement it is through a trust vehicle, which can help to legally define its rules, protocols, functions, and requirements. Furthermore, it can also promote the entrepreneurship of the founders by acting as a venture capital fund for family members’ startups, without mixing ongoing company operations and funds with new ventures.
The Corporate Universe
At the outset, founders tend to make all decisions unilaterally, allowing their companies uninhibited growth. Their main concerns are commercial and financial, rather than holistic, and the need for advice from an independent expert does not become apparent until it’s too late. This is generally after a critical event, such as fraud or compliance failure, reveals the shortcomings of the approach to that point. Companies are always built on their founders’ strengths, avoiding their weaknesses. However, these weaknesses can’t be avoided forever — they eventually threaten the company’s success. A successful business needs help solving, and ideally predicting, challenges where the founder’s expertise is lacking. One of the best steps is to establish a consulting board of directors where the owner still holds the final decision — after hearing the experts in different fields in the boardroom.
The next step is consolidating a corporate governance model where the board’s charter is defined, with clearly laid out roles, responsibilities, member profiles, and governing structures. Also included should be the board’s operational protocols and the information system that allow members to make the best possible decision with the available information. It follows that all information provided to the board must stem from internal processes and procedures, so the integrity of the information is guaranteed. Not a report created for the board alone, but used in ongoing company operations — a dynamic, living document so decisions will be based on accurate data.
With these in place, the board can deepen its understanding of the risk-to-return equation inside the business model. To do that, they must ensure that many factors are included inside the boardroom: internal and external audits; strategic planning; corporate finance; cybersecurity; nomination and compensation programs; internal controls; compliance; sustainability; environmental requirements; ethics; and other corporate governance best practices. There must be balance and diversity in the collective expertise and experience of the board so that all can contribute to the growth of the company. A balanced board must include not only technical capabilities, but also diversity in gender, race, and field of expertise. This adds utility to the founder and the company, without which the founder won’t see the value of the board.
Further Recommendations
Founders must assess their company’s place on the roadmap to determine the next steps in each universe. They must consider that their place in each universe is independent of the other — it could be state-of-the-art in one but struggling in the other. The professional expertise required to guide a family-run business through this must include proven experience solving family succession processes, such as assets and trusts, corporate law, and best corporate practices for family businesses. We at CleverBoD and our partner In Commendam Trust Services invite you to learn more on our website and to keep an eye out for more of our in-depth articles guiding your family operation to success.