Globally, by the year 2010, family business owners ready to retire and pass the baton will transfer an estimated $8 trillion of wealth to the next generation. These businesses are the backbone of the world economies. Believe it or not, in the United States alone, family businesses constitute 90% of the more than 15 million businesses. Slightly over one-third of the Fortune 500 companies are family controlled. Family business is an even greater reality here in Lebanon and throughout the Middle East. Think about this for a moment, “In the Middle East not only do we have family run businesses, we have family run countries.” The family plays a critical role in running our lives and businesses.
Listen closely and we often hear business owners’ comment, “I started this firm to gain freedom and security not available elsewhere. The success I have had is something I would like to pass on to my children. I hope they come into the firm, but they must have the patience to learn the business before they take over.” Unfortunately this is not the key to the future of running a family-owned enterprise. Change is happening rapidly.
Tom Peters in his seminal book, In Search of Excellence stated the following, “I know that the future does not belong to the companies I grew up with, the elephants that used to rule the world and that I used to serve.” It now belongs to the family business and even that sphere is changing. No longer are we speaking simply of our father’s shop. Family business is transforming into a worldwide enterprise.
What are the main forces of change? Globalization, generational business succession, and growth.
Conflict between family values and business needs is part and parcel of a growing company’s often painful maturation. As the first generation of entrepreneurs mature, their adult children are coming to work for them or moving into more responsible positions in the family business. So tensions are inevitable. In actuality, less than three out of ten family businesses succeed till the second generation. One in ten family businesses survives till the third generation. Lebanon has traditionally been successful in this domain, with many local businesses tracing their ancestry back more than two generations. Currently, 75% of the local businesses are run by the second generation.
In the very first stage of life, the family business started by the founder, must find competent employees and he or she must set the stage for a value and belief system which will prevail throughout the life of the company. The company at this stage fights to survive and eventually move to the second stage, growth. Beyond survival, the founder must think of competition and strategies. Once expanded, management functions tend to become paramount, delegating, organizing, staffing, sharing power, training family and non-family employees are some of the necessary functions that must be executed.
Succeeding through the Changes
Family businesses are viewed as enterprises that look backward with pride and forward with hope. For the hope to become a reality, the leaders of today’s family businesses must learn how to adapt to a competitive business environment, which is dominated by powerful multi-national corporations.
To find out what family businesses can do to ensure that they keep going – and growing – let’s look at what some of the top family business experts have to say. They all concede that addressing family business issues can be difficult, but insist it’s worth the effort if your company goal is strength and longevity. But, keep in mind that there are no easy answers; specific strategies and solutions will depend on your particular situation. The recommendations that follow are designed to help you get started.
Establish clear criteria for joining the family business
Experts say that sharing your last name with people isn’t the best reason for inviting them into your business. Qualifications, including education, skills and related work experience, should be weighed more heavily than family ties. That may mean throwing out old stereotypes about roles and relationships. You must recognize when a daughter might be more qualified than a son, a younger child more adept than an older child, or a son-in-law a better choice than a close blood relative. Also, make clear to those family members who own stock, but who do not work in the family business how much (or how little) that ownership entitles them to take part in the affairs of the company.
Define the roles and responsibilities of family members who work in the business
As soon as family members agree to come into the business, the next step is to clearly define their roles and responsibilities. Exactly what work is expected of them? To whom will they report? How will they be evaluated and promoted? Also, be sure to pay family members fairly. Some experts suggest that you base salaries and benefits on what a person would earn in a comparable position at a comparable company. Others suggest that you tie compensation to a person’s value to the company.
Adding family members, or involving them in different areas of the business, can create unexpected changes. For example, your son’s aggressive marketing plan might help increase sales, but it will also require a larger budget. Founders should be prepared for both the positive and negative impacts of new blood in the company. “The next generation should help move the business to the next level.”
Define the roles and responsibilities for non-family members who work in the business
Most family-owned firms also hire non-family workers. In fact, attracting and retaining qualified non-family employees is a key concern for many family companies. How do you ensure that non-family workers feel valued and reduce the perception of nepotism? The answer, say the experts, is to treat them fairly. They hasten to add, however, that fair is not always equal. For example, founders usually want to reserve certain executive-level positions in the company for family members.
No matter who they bring on board, families really don’t want to give up any power in the business. That’s why it is crucial to clearly define everyone’s responsibilities and range of authority.
Separate family and business issues
Many problems in family-owned businesses stem from the fact that families and businesses are separate systems that have different, often competing, needs and goals. Whereas the primary function of a family is to nurture relationships and raise children, the primary function of a business is to increase production and generate profits. The overlap of these systems creates confusion.
Choose and train a successor
Deciding who will eventually take over management of your company is the first part of a two-part process called ‘succession planning.’ It’s one of the most difficult issues you will face. “The problem is you’re talking to me about being gone.” You may worry about relinquishing control of one “baby” (your business) to another “baby” (your child or children). Effective succession planning should anticipate these concerns and include opportunities for the founder to train and mentor the successor, and for the successor to assume significant responsibilities in the business. To succeed in transferring the business to their offspring, family business managers must be ready to adjust the organization to the skills, perspectives, and values of the next generation as part of the implementation of strategy. The successful integration of new family members is a goal that for many family enterprises is as important as profit targets, business niches, and other determinants of the firm’s business policy. Incorporating new family members into the firm, however, is often complicated by a blurring of boundaries between the family and the family business.
Seek help from qualified outsiders
Most family-owned firms keep family and family business matters private. Company founders rarely ask for help from outsiders, other than their lawyers and accountants. Consultants, who are trained to consider both family and business issues, are another good resource. Their job is to coordinate the efforts of a team of experts that may include your attorney, investment adviser, and even your banker.
No growth-oriented company should be without performance planning, coaching and counseling, annual evaluations, career development and reward and incentive programs in place.
Planning for the integration of the younger generation into the family firm is an issue of strategic importance, although offering challenges and finding a place for younger family members, or adjusting the organization to the new generation’s inputs and demands are issues not usually included as goals for sound business planning.
Many owner entrepreneurs produce and sell products or services with relative ease but lack the skills to pursue a long-term growth plan. An older generation that takes pride in “teaching the kids the business” in effect may be training them to do what no longer works. To help family-run companies overcome this myopia and figure out ways to move forward, they need strategic and operations planning.
Entrepreneurs build companies without blueprints, and it shows. Solid plans and capable personnel accomplish little without the inspiration of effective leadership, or management, at all levels. Good leadership breeds understanding, confidence and motivation, and it assures equitable treatment for all, including employee managers or skilled technicians who may be key elements of a company’s success.
Survival in the 21st century means adopting new technology and adjusting to continual change. The evolution of a global marketplace has shortened product life cycles, revolutionized marketing and distribution, and eliminated traditional functions and organizations. Private businesses, especially family-owned ones, have to adjust to these and other worldwide developments. Businesses that stick to what worked for Dad or Granddad and maintain the status quo may be headed toward an early demise. Today’s family businesses can no longer rely only on “father knows best.” It is time to accept outside input and advice from your children if you are to succeed in the 21st Century.
Tommy Weir and Christine Crumrine are from Beirut-based CrumrineWeir, the global leadership experts