Successful family businesses have two things in common. They have strong economic performances, and they keep family members motivated. Read on to find out about five essential factors that will determine the long-term success of a family business.
Effective Wealth Management
Families that run a business together need to have good heads for money, as sound business and personal financial strategies help to preserve harmony within the family. Those responsible for dealing with finances need to be good at mitigating risk and choosing investment and divestment strategies, but all family members with a stake in the business need to have a good understanding of what the company is worth. To avoid fighting about money, hire a firm to perform an accurate Business Valuation so that everyone knows what the company is worth and what their stake in it really is.
Family members should play a large role on the boards of their companies, but in most cases, these highly invested board members are balanced by knowledgeable outsiders. The goal for the business should be long-term, steady growth that will continue to provide a solid economic base for future generations. Hiring outsiders can help to minimize risks without giving up control of the business.
Most successful family companies keep at least half the seats on their boards, then ensure that the rest of the seats are held by successful people from outside their own families. This helps to ensure strong governance without causing unnecessary family disputes.
Dedication to Responsible Ownership
In order to continue to grow, family businesses need to be run responsibly. That means as older family members retire, they need to ensure the younger generations are committed to responsible ownership. This is yet another reason that hiring some outsiders is a good idea, as it helps to eliminate the possibility of one family member making poor business decisions.
There are a few ways to keep control of a family business while simultaneously bringing in plenty of outside expertise. Some families put regulations in place saying that family shareholders must offer their relatives their shares first if they want to divest, while others opt for generational liquidity. Either way, it’s good to have set-in-stone regulations in place.
Good Family Relationships
Running a family business can give some families a sense of shared purpose. They develop agreements about how to run the business and help each other succeed.
In other families, running a business together can cause all kinds of conflicts. Make sure that everyone’s expectations are clear to maintain good family relationships and avoid conflicts about money.
Establishing private charity foundations is a great way to keep families committed to their businesses. Those who don’t work in the business can work for the charity, which will give them the opportunity to prove the family’s commitment to its values. Plus, sharing the family’s wealth as an act of social responsibility generates goodwill among customers or clients.
The Bottom Line
Running any business can pose significant challenges, but family businesses are even trickier. Without appropriate governance, solid financial planning, a shared sense of purpose, commitment to keeping the business in the family, and good interpersonal relationships, the businesses won’t be able to meet their full potential. Keep in mind that there’s nothing wrong with hiring outside consultants to offer advice about financial planning and other specialized fields as long as the majority ownership stays in the family.