STARTING a family business presents unique challenges over and above the usual problems a start-up faces. That’s why only one in three family businesses survives to the next generation. Less than 1/3 survive the transition from 1st to 2nd generation ownership. Of those that do, about 1/2 do not survive the transition from 2nd to 3rd generation ownership. (Source: Small Business Administration; Nancy Bowman-Upton, 1991).
But family businesses have some great advantages over others — they provide mainly a dedicated pool of people ready to stand behind the founder’s efforts. If your startup is a family business, you’ll need to take extra steps to avoid burnout, ensure on-the-job harmony and attract advice from business experts outside the family circle.
In the startup stage, the dangers can be especially acute. Family members sometimes join the excitement of a business startup without a clear idea of their role once the business is underway. If family is involved in your startup venture, you should be clear up front about compensation, exit plans and other details before they become a problem.
Some of the common family business issues involve decisions on:
- who will participate in the business
- how leadership and ownership will be transferred
- how to help the founder change roles or leave the business
- liquidity and estate taxes
- how to attract and retain non-family executives
- family compensation – genes or merit
- how to choose successors
A research study supported by the Swiss private bankers Lombard Odier Darier Hentsch & Cie, a seventh generation family business (founded in 1796), reveals the powerful impact of emotional ownership (EO) on the success of a family business.
The report looks at the origins of EO and how to create family capital and emotional engagement in the family firm. Following in-depth interviews conducted with 600 Next Generation members of family firms in 67 countries, it became apparent that the bond between the Next Generation and their business is very much a product of the family,” said Thierry Lombard, Managing Partner of Lombard Odier Darier Hentsch & Cie.
“As a seventh generation family business, we know that the loyalty and passion people feel towards a family business can be a source of competitive advantage.
Emotional Ownership thrives on informality as well as close involvement and inclusion. Few elements can stunt the growth of Emotional Ownership once the bond is achieved; however, badly managed conflict is one of them. For family businesses to be successful over the long-term, this commitment and passion needs to pass down through the generations.”
Foster Emotional Ownership. “It is the golden thread that underwrites a family business’s future existence. EO is a natural state of mind in a healthy family, but it needs to be nurtured quite early on and can be easily disturbed by bad parenting and lack of engagement,” said Nigel Nicholson, Professor of Organizational Behaviour, London Business School.
EO is defined as a combination of two elements. Firstly, a sense of closeness and belonging to the family business – what psychologists call “attachment”, and secondly, the penetration below the surface of the mind into the identity of the person who experiences EO. EO captures the idea that the business is, in some sense, part of who you are as a person. This is what psychologists call “identification”.
Emotional Ownership needs to be fostered from a young age, and the process increased so that the business becomes part of the person. The research found that EO is strongest between the ages of 31 and 40, when it rises to a mid-life peak.
Stimulating EO comes from social inclusion, proactive engagement and close involvement in the family business through work experience, business workshops and philanthropy. Family culture, pride and values also play an important role. Furthermore, proper ownership and governance structures are essential to avoid conflict.
A fair, flexible and transparent governance structure, which gives all family members the opportunity to make decisions, will help ensure the business continues to thrive in succeeding generations.
Seek outside advice. The decision-making process for growing a family business can sometimes be too closed. Fresh ideas and creative thinking can get lost in the tangled web of family relationships. Seeking guidance from outside advisors who are not affiliated with any family member can be a good way to give the business a reality check.
Develop a succession plan. A family business without a formal succession plan is asking for trouble. The plan should spell out the details of how and when the torch will be passed to a younger generation. It needs to be a financially sound plan for the business, as well as retiring family members. Outside professional advice to draw up a plan is essential. Lack of proper knowledge in management succession usually spells the difference between success and failure of a family business.
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Prof. Soriano is the Turnaround Advisor of wongadvisory.com and the Chairman of the Marketing Cluster at the Ateneo Graduate School of Business. For comments please email writer at [email protected].
