Soriano: Founder’s Dream: Preserving wealth, unity and legacy (Part 2)

Enrique Soriano
Inside Family Business

ACCORDING to the Family Firm Institute, “While the majority of family business owners would like to see their businesses transferred to the next generation, it is estimated that 70 percent will not survive into the second generation and 90 percent will not make it to the third generation.”

Despite all these dire warnings and horrific tales of family conflict, it is indeed unfortunate that many founders and owners of family businesses end up being tagged as primary culprits for not initiating any form of transition even more so related to succession. Their continued inaction aggravated by their unwillingness to empower the next generation can cause a painful blow to the business. Their stubborn refusal to institutionalize rules can also result in strained relationships among next generation members. Finally, the founder’s reluctance to embrace the right governance tools (agreements) inevitably lead to paralysis in decision making should an unexpected event like death or incapacity or misconduct happen.

In this yuletide season, I strongly encourage business leaders to reflect on the importance of succession as this once-in-a lifetime event should never be taken for granted. To continue with the time-tested succession steps shared in my last article, I have added several ways to ensure a smooth succession reinforced with a culture of stewardship rather than ownership among family members.

3. Laser focus on a minimum of 5-Year Transition Plan

Effecting real change in a family business takes longer than in other organizations. Change especially related to governance and strategic initiatives in a family business environment is very sensitive especially when it involves two or three generations and several branches of the family. By default, families especially the senior leaders don’t like to recognize the need to change and so they delay the process and pressures build up. When family members are muted, their ideas always put down and there is no visible plan on how to march forward in unison, tensions like bubbles in a pond surface.

The key to embrace change is by initiating a process that challenges family members to prepare for the short-term future. KPMG has created a powerful model that covers two vital components in embarking on a succession journey and they defined it accordingly: “Family business succession is the process of transitioning the ‘management’ and the ‘ownership’ to the next generation. The transitioning of management and ownership can take place simultaneously or it can be done one step at a time.”

4. Prepare solid family agreements

It is hard to create agreements within the family because things are fluid and pursuing change is and must always be in accordance with the whims of the founder or business leader. The fact that siblings are good partners now does not guarantee the same relationship when they become future owners and business partners and when they have families of their own. It is crucial for the founder to initiate and prepare good shareholder or ownership agreements while the children are still young. Getting family members to sit down and work on these agreements can be powerful guide posts when it’s needed, and doing it in advance before a family needs it is a founder’s most valuable gift to the next generation.

5. Family and business goals are fundamentally different

It is a unique system fraught with emotions that has naturally different goals. Family members may share the same values but may have different visions of where they want the business to head. Another example of conflicting goals (and usually a cause of major conflict) would be in the area of compensation and dividend sharing. The growing family may need high dividends to sustain their personal needs, but the business needs those capital reinvested. Another contentious issue is on the area of employment where parents want their children to lead the business but the business needs to operate based on meritocracy, thus engaging the services of a non-family member becomes a critical dilemma for the family. Is it family first or business first? More often than not, families turn a blind eye on non-family talent and risk having an incompetent relative managing the business.

6. Change matters; technology is non-negotiable

Family businesses must realize the importance of pushing for change. We are seeing the internationalization of businesses where sourcing, selling and buying are all borderless transactions. This pandemic has shown many kinks in the armor of family owning businesses. For it to succeed, family members must encourage and continue to embrace change as a core value while protecting the Family Legacy.

To be continued…