For Family Businesses, No Easy Answers…Only Options
“Each family business is unique it its makeup, its culture… each has its own vision, goals and perception of success” — Fredda Herz-Brown
“There are no pat, easy answers, no real quick-fix solutions…only options,” Dr. Fredda Herz Brown, a family business consultant, told the members of the Family Business Forum during a session at the Rothman Institute of Entrepreneurial Studies at FDU on March 27th. “Each family,” she noted, “is unique in its makeup, its culture…each has its own vision, goals and perception of success…all of which impact the upcoming generation and the future of the family business. You need to learn to deal with the issues,” she said, adding, “I have found that families are among the most creative in resolving issues.”
Communication within the family , Brown noted, is extremely important. “Many family businesses go down the drain because one spouse doesn’t talk to another. You have an argument, a problem involving your brother and you discuss it with your wife. You later make up with your brother; after all, he is your brother, but your wife is still angry and may refuse to go to family functions,” she said. As family members, you need to deal with your emotions, communicate your feelings, anxieties, frustrations and differences. Familial conflict, when ignored, may have a disastrous effect on the business. Family members have to be able to separate their personal feelings from those relating to the business, she said.
Owners/parents, she noted, also face some tough decisions. “How do you fire your kid?” she asked. If he’s not producing, but still remains “untouchable,” you’re doing yourself, your kid, and the business a great injustice. Also, if you create a position where one doesn’t exist to provide for an offspring, you’re creating what amounts to a welfare state, and no one benefits, she said. It’s difficult, she told the audience, to switch hats from parent to business owner. Family businesses, she noted, are complex, and a businesses can just as often ruin a family as family relations can destroy a business. Sometimes it takes a knowledgeable outsider to bridge the gap and mentor the upcoming generation.
There are three essential questions to consider when looking into the future and developing leadership, according to Dr. Brown.
1. What will the next generation be trained for?
What’s the business going to be like? Will there be a business? You need to look at the industry, see where it’s going and how it will be affected by the new technology, according to Dr. Brown. You need to recognize and plan for change. Developing a plan for five years is no longer applicable, she cautioned. You need to think in terms of 18 months, one to two years ahead, to compete effectively in today’s environment.
2. What will the training look like and who will participate?
Training the upcoming generation is a key factor, Dr. Brown said. With things changing rapidly, you need to think and plan in shorter segments, and establish mentors who can guide the younger generation. There are, she further noted, many ways of gaining knowledge beyond schooling and the business. Working outside in a different industry may provide a broader perspective and give the child a sense of worth when he/she does come into the business. Young people need credibility and respect. Working outside can provide that credibility along with the skills and knowledge they will subsequently bring back into the business.
3. How do you evaluate the business?
There are several ways, she said, including non-family managers, paid advisors, and advisory committees. Ownership, she noted, carries a responsibility …. to the employees, the shareholders, clients/customers, vendors, etc. Owners need to be able to make decisions, measure risks, set the agenda and have the ability to sort it all out. They need to set the moral and ethical tone for the company, and be able to transfer and communicate that spirit. She called it “important” for the business to reflect the family culture.
Owners also need to teach their heirs some very basic things, early on, things about money, budgets, sharing, charity and community responsibility/involvement. In the end, she said, we (owners) are all merely “stewards, really only caretakers until the next generation.”
Some Common Myths:
Dr. Brown sought to dispel some common myths; such as “non-family members will sabotage the training of the next generation,” calling it “the dumbest thing.” Outsiders, she said, cannot come between families. As for the founder being the only person who can choose the successor…unless you start very early, you will run the risk, she said, of being accused of favoring one child over another.
With corporate America changing, more and more kids are coming back to the family business, according to Brown, and with a stake now in the business, they want a say in who will be its future leaders. Her suggestion to owners, ” don’t choose, let the kids choose (your successor)…Pick a name, instead, she said, and file I away in the drawer. When the time comes, take it out and compare it. You’ll find the kids have made the right choice, in all likelihood, the same choice as yours, but the key here was the difference in process. They, the younger generation was involved … had a role in deciding who can best lead the company. Having participated in the selection, they will support the new leadership. She called family support critical to ongoing success.
As owners, you need to separate management from ownership, Dr. Brown told the group. The upcoming generation may not be ready to assume responsibility for the business when you’re ready to step back, she said, adding, that’s when you will need a talented outsider who can run the operation while training your heirs. The upcoming generation is not entitled to the business by virtue of birth. It needs to earn it, according to Brown. An outsider can help it do that with proper mentoring. But, an outsider at the helm also needs to know the facts, and to be properly compensated for his/her efforts, according to Brown.
Offspring should be evaluated and paid based on their performance and contribution to the firm. Compensation should reflect what they do and not who they are, Brown said. She suggested family councils to set the structure, define and analyze performance, establish standards and evaluate the upcoming generation.
Some founders, unlike many members of the younger generation, may resist bringing in outsiders to help run the company, Brown said. However, professional advisors, an outside board of directors, can provide a new, different perspective that will keep the business focused on the future, beyond the day-to-day operations. An outside board of directors can also provide an effective bridge between the generations, as well as leadership guidance to prepare the upcoming generation for the responsibilities that come with ownership.