Most family business owners have a similar goal in mind – to grow the business and pass it on to the next generation of their family.
While keeping the business in the family and getting to work with your parents, siblings, or children who share common goals can be a fun and rewarding experience, running and growing a family-owned business isn’t without its challenges. Conflicting views on business and family matters such as the succession of power, rivalry, favoritism, and disposition of assets often lead to tensions and even legal disputes.
So if you want your business to thrive while keeping family control over multiple generations, it pays to plan ahead and be prepared to navigate these complexities. Below we’ve listed some ways to avoid the most common pitfalls when managing and scaling a family-owned business.
Financial Planning for Your Family Business
It is important for family businesses to build a financial strategy for the long-term to withstand external impacts such as economic downturns, changes in the industry landscape, and potential local or global crises. While ensuring that you turn a profit this quarter and the next is beneficial, proper financial planning that focuses more on the goals for the next generation is what establishes growth, smooth operations, and stability for future years.
In order to grow your family business, your financial strategies should focus on putting the interests of customers and employees first, adapting to market uncertainties, accurate budgeting, managing risks in long-term investments, and promoting social responsibility.
Business Management Planning
One of the most critical drivers of growth and good bottom-line performance for family businesses is strategic business management planning. An effective plan in this area includes:
- A formally agreed business ownership structure
- Determining management control and operational oversight
- Hiring policies for family members
- Compensation plan for family members who are active in the business (and those who are not)
- Succession planning
- Managing Family Issues
Family issues are unavoidable when running a multi-generational business. Disagreements on business matters such as mergers, sales, acquisitions, profit distributions, and compensation can be serious issues.
When it comes to compensation and profit distribution, each family member who is a shareholder expects a share of sales proceeds and salaries. The best practice is to assess this based on comparable positions at similar companies.
It is also important to note that not because someone is a member of the family, he or she must automatically be employed in the company. Only those who can perform well should be hired.
Some of the criteria that should be considered include the family member’s skills and capabilities, education and other training, personal motivation to join, temperament, and the business’ ability and need to support the hire. Also, a well-defined job description and performance evaluation process should be a part of the system of employment for family members.
To ensure that the core values, principles, and ethics are sustained across multiple generations, all family members employed in the business must do their part and cooperate. Failing to do so leads to mediocre quality of output, poor customer service, and customer satisfaction, as well as tainted family business reputation.
Succession Planning in Family Business
Succession planning refers to determining company leadership and to whom shares of the company will be left.
This process can be tricky when it comes to family businesses as it involves resolving conflicts about assets and management. While many fail to continue operating into the second generation and even more fail to survive into the third and fourth generations, there are tips to sustain a family business and retain control over many years including:
Roles must be defined clearly even if they are held by close family members.
Strong company leadership and governance systems should be developed and put in place.
There should be fair and transparent procedures for conflict resolution.
Robust standards for business ethics and company culture must be established.
Vision and focus on long-term goals that span towards the next generations should be inculcated in the minds of everyone, particularly those in leadership roles.
Although family businesses are typically rooted in shared goals and values, family ownership itself will not guarantee that you will be able to retain family control or the business will survive many decades. However, through the essential tips shared in this article, and our guidance, you will be able to face the unique challenges in running a family business head-on.
Got a question about your Macarthur family business? Please don’t hesitate to get in touch with us today, your local small business accountant in Mount Annan.