Just as every one of us has a financial life cycle—we accumulate and grow wealth, live off its income in retirement and in the end pass it on—family businesses tend to follow a pattern. From the seed stage, they grow revenues as a startup, mature as a cash-flowing enterprise and, if not attended to, go into decline as the founder or their successors fail to meet the demands of a constantly evolving business environment.
It doesn’t have to be this way. Properly structured and managed, family companies can not only survive the transition from one generation to the next but, in rare cases, many generations. In Nicola Wealth’s recent webcast, The Family Business Life Cycle, Nicola Wealth’s in-house family dynamics specialist Rick Goossen outlined ways founders can enable their ventures to break the cycle and thrive under successive generations.
Whether the business is ultimately sold or kept in the family, “value is created by making the business appealing to potential purchasers,” Goossen noted. He went on to identify five attributes of successful multi-generational businesses:
1. Good communication and transparency
Too many family businesses perish because the founder kept all the facts and figures in their head. They made promises then forgot them. “When money is involved it can get a lot more complicated. The money can be like throwing gas on a fire” of familial resentment, Goossen said.
2. Shareholder agreements
A sole owner may not give much thought to the rights and obligations of shareholders, but they should, if only for when they have to transfer that ownership to their heirs, which in most cases could be multiple people and result in conflict. With well-drafted rules and buy/sell provisions, those successors can avoid conflict that diminishes the value of the enterprise.
3. Good governance
A business that is dependent on the founder is a fragile one. While they are still in control, owners should establish channels to review decisions, reach consensus and resolve conflict. Before and after the founder’s passing, heirs involved in the running of the business need clear job descriptions and powers. They and others must know who they are accountable to.
4. Entrepreneurial culture
Different stewards of a company will have different mentalities. A driven, risk-taking founder may give way to more custodial successors. Regardless, the founder’s spark must be embedded in the organization’s DNA. People must be empowered throughout the company to bring forward and implement ideas to grow sales and profits and be duly rewarded for doing so.
5. Systems, not personality
Ego-driven founders can jeopardize the family business by wanting to be indispensable right to the end. Building wealth in a family business involves creating systems and procedures for doing things and building a team that can execute a plan that is not dependent on one person. “Success for you and your company is measured not by how much people need you but by how little they do,” Goossen said.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.