Family business best practices: an overview
What does it take for a family business to be world class?
There are four well-known best practices derived from studying multigenerational family businesses the world over. These best practices are found in family businesses that have successfully transitioned to a third or subsequent generation. They include having:
- A strategic planning process and written plan.
- A succession plan — or at least an emergency succession plan.
- Family meetings.
- Non-family board members.
Take a minute: How many of the above are parts of your family business?
If you have implemented even one of the above best practices, you are well ahead of most.
Assuming you have built your business to pass down to the next generation, you may want to consider implementing these best practices.
My recommendation is to learn what they are and then decide if they are right for you and your business.
“A plan that is not written down is not a plan. It’s just an idea.” This axiom was included in a 2014 PricewaterhouseCoopers survey. It especially applies to family business planning.
In an article written by Michigander, mentor and friend Joe Schmieder for the Family Business Consulting Group, fewer than 33 percent of family businesses have a written strategic plan, and “studies show that a business with a written strategic business plan outperforms those without one.”
Why is the strategic planning process so important?
According to Schmieder: “The planning process helps to incorporate calculated risk taking and balances the senior generation’s need for more wealth preservation with the younger generation’s desire for more wealth creation. In addition, a transparent process that involves as many stakeholders as possible builds trust and consensus around these complex choices that will affect both the business and the family.”
In a 2014 study of local family businesses conducted by Grand Valley State University’s Family Owned Business Institute, only 19 percent of the respondents identified as having a written succession plan.
An international family business study done by PWC that same year shows 30 percent have “properly documented plans.”
Locally, a slightly higher percentage of family businesses have something called “an emergency succession plan,” whereas nationally the stats show closer to 59 percent of these businesses have a detailed contingency plan.
An emergency succession plan details what happens when a key person in the company has an emergency event and can’t come to work. Usually this is a serious and incapacitating accident that could lead to death. The plan outlines who fills in and whether the business continues to run or comes to a screeching halt.
I have heard of consultants using the following exercise to develop an emergency succession plan: The management team and key employees get into a room together with a facilitator. One person, for example the CEO, is selected to sit in the corner. The rest of the team is challenged to come up with a plan if something happened to that person.
Each key person gets a chance to sit in the corner while the rest of the team creates the emergency succession plan. This plan is shared with the entire company in the chance something happens.
Depending upon the size of the company, this exercise could take a few hours or a few days. It is well worth the peace of mind to have a plan when tragedy strikes.
In a 2013 study by Deloitte titled “Perspectives on Family-Owned Businesses: Governance and Succession Planning,” it was noted that 35 percent of family businesses hold family meetings. The benefits of family meetings are numerous. They facilitate family communication, get the next generation interested in the business and can be a no-pressure place to ask questions.
It is highly recommended to have someone outside of the family run a family meeting. Not having family facilitate the meetings allow for better dialogue from participants. Additionally, participants tend to behave better. As the third generation in my family’s enterprise, we have our estate attorney run our family meetings.
Family meetings can take place at any interval. In the above study, of those who have family meetings, 98 percent have them annually. Whatever the frequency, the point is to meet.
Non-family board members
Most family business boards are controlled by family members. From the GVSU study, only 19 percent of the family businesses who responded have non-family on their board of directors.
Why would you want independent board members on your company’s board?
Recently, I had a group of family presidents and CEOs come up with more than 20 reasons.
They determined that non-family board members help with succession to the next generation, encourage accountability, critique strategy and provide expertise — because you don’t know what you don’t know.
Ellie Frey Zagel is director of the Family Business Alliance. She can be contacted at www.fbagr.org or firstname.lastname@example.org.