Management and Legal Challenges in Planning A Family Business

The management and operation of a family business raises legal and strategic challenges that traditional businesses rarely face, primarily because love and business often don’t mix. For example, how do you handle the firing of a key employee who has become obsolete or unproductive when that person is your son, daughter or nephew?

The management plan and structure in a family business can neither be too rigid to ignore the fact that circumstances can and will change, nor be left for the last minute with the business being turned over on a whim to whichever relative was standing closest to Uncle Fred when he died. There are several key steps that can be taken today to assure effective operations and save management structures for the present, as well as set the stage for a smooth transition in the future. These steps recognize that any successful transition is, by definition, a process and not an event. Therefore, now is the time to begin that process by implementing the following:

Prepare an Organization Chart With Defined Position Descriptions. Determine now which family members (and non-family members) will hold which positions, with clear statements of duties and responsibilities, as well as the performance goals to which they will be held accountable. In assigning positions, be guided by merit, education and commitment, not by love or nepotism.

Train, Train, Train. Set up a system for training, coaching and formal mentoring so that the current generation of leadership can begin to impart knowledge, experience and trade secrets to the next targeted generation of leadership. The training should not be ad hoc, but should be structured as a mix of formal classroom training, field experience and informal training at social or family events. Start now before you are unable due to death or disability. Start now before you lose the next generation of leadership to a competing company, career or other life circumstance. Start now so that key lessons can be repeated and reinforced, not all dumped at once a month prior to your retirement. Start now so that you will be able to enjoy your retirement without six phone calls a day from your son or niece!

Get Good Advice. One of the keys to peaceful current management structures, as well as an eventual smooth transition, will be driven by the quality of the advice and input that you will get from your professional advisors, such as your accountants and attorneys, who should be experienced with the succession planning and transition management needs of closely held and family-owned businesses. You will also need an objective and experienced Board of Advisors, made up of outside business leaders and professional advisors who can help the company with difficult transition management decisions, as well as with the implementation of the transition management plan.

Establish Governance and Communication Structures. Many well-run family businesses anticipate succession issues well in advance and create a culture of genuine interest and involvement early on by creating a “Family Council” or even a “Family Assembly” depending on the size of the family. These non-traditional governance and communications groups may have certain protocols or by-laws (or even a constitution), which leave key decisions to be discussed and even voted upon by affected family members in a manner which augments and supersedes the traditional decision-making structure set forth in typical state corporate laws. These group-developed core principles will assist in the selection of the next generation of leadership. For example, once the vision for the family business is articulated, the Family Council then has a better idea of the types of future leaders it needs to begin to develop today.

Establish Criteria to Eliminate Surprises. The current generation of leadership should establish criteria for ownership and management candidates in the upcoming generation in order to remove the element of surprise when the successors are selected. The criteria must be clearly communicated to all involved. While it should be objective — noting education, performance and experience – it could also include some subjective standards and factors, such as passion, commitment, respect and trust by family members and employees. Establishing these criteria and then sticking to them will not only virtually eliminate the element of surprise, but also mitigate the risk of anger, dissent or even litigation.

Communicate Early and Communicate Often. The current generation of leadership must constantly communicate with the next generation, sharing information and imparting knowledge, not only to build trust, but also to take the pulse of the goals, circumstances and general mood of the next generation of family business leaders. The communication channels should be established and kept open through periodic reports, quarterly meetings, one-on-one mentoring and other forums to keep the next generation interested in the family business and poised for transition. These channels will help ensure that the proverbial baton is not dropped on the track during the handoff to the next
generation.