BusinessDay

Build a family business that lasts

Given their portrayals in the media, it might be easy to dismiss family businesses as hotbeds of power playing, officious flattery and backstabbing — preoccupations that can hurt the company, the family or both. Think of the Murdochs and News Corp., or the Redstones and National Amusements, to name just two. But despite the headline-grabbing tales, many family businesses have enjoyed success for decades, even centuries.

Are family businesses prone to dramatic implosions, or are they some of the most enduring companies in existence? The answer is both. They can be much more fragile or much more resilient than their peers. Given that family businesses — companies in which two or more family members exercise control, concurrently or sequentially — represent an estimated 85% of the world’s companies, ensuring their longevity is essential.

To explain the difference between those two fates, we’ll delve into an area rarely explored in business schools or the media: the impact of ownership on a company’s longterm success. Ownership of any asset confers the power to fundamentally shape it. Ownership of a family business rests with a relatively small number of people, who are related.

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Five core rights accompany family ownership — the right to:

— Design: What type of ownership do you want?

— Decide: How will you structure governance?

— Value: How will you define success?

— Inform: What will — and won’t — you communicate?

— Transfer: How will you handle the transition to the next generation?

What type of ownership do you want?

Family businesses are often lumped together as if they were all the same. But four fundamentally different types exist, distinguished by who can be an owner and how owners share control.

Sole owner:

One family member owns the company and is responsible for all decisions. This works best when the business requires decisive leadership and creates enough liquidity to satisfy nonowners.

Partnership:

Ownership is restricted to family members actively working in the business. This allows for multiple perspectives and requires clear rules governing how people can join or leave the ownership group and what benefits accrue to nonowners.

— Distributed Ownership:

Any family member may be an owner and participate in decision-making. This works well when most of the family wealth resides in the company, when it is mandated by law or when it is expected by family culture.

Given their portrayals in the media, it might be easy to dismiss family businesses as hotbeds of power playing, officious flattery and backstabbing

Any family member may be an owner, but a subset controls decisionmaking. This works well when decisive action is required despite a multiplicity of owners, and it mitigates some of the challenges of distributed ownership. But the question of who will exercise control becomes more complicated with each new generation.

How will you Structure Governance?

Governance in a family business is all about finding a middle ground between micromanaging and abdicating responsibility, and it becomes more challenging as the family and the business grow. We suggest a simple framework to guide decision-making: the four-room model. Imagine your business as a home with one room each for the owners, the board, management and the larger family. The owners set high-level goals and elect the board; the board oversees the business and hires (and if necessary fires) the CEO, and management recommends business strategy and directs operations. Because the board and management report to the owners, the first three rooms are in a row, with the owners’ room on top. The family’s room, which is critical for maintaining members’ emotional connection to the business, sits alongside the other three, underlining the importance of family influence and unity throughout.

How will you define success?

The owners of a business have a right to the residual value it creates. With that right comes the ability to define success. You get to determine what matters most. You need an owner strategy that identifies concrete goals and sets up guardrails.

— Goals: These fall into three main categories. You can aim for growth: maximizing financial value. You can seek liquidity: prioritizing a healthy cash flow for the owners’ use outside the business. You can look to maintain control: keeping decision-making authority firmly within the ownership group by avoiding outside equity or debt.

— Guardrails: Aligning on priorities is essential. But without concrete ways of measuring performance, it’s just lip service. Guardrails can help ensure that those running the business day to day are directing their energy and resources toward what you as owners care about most.

What will — And won’t— You communicate?

Owners are legally entitled to know a great deal about their business, such as what’s in financial statements, certain organizational records and ownership documents. And except when they bring in outside investors, lenders or board members, they are not obligated to share that information with anyone (other than the government).

How owners exercise this right significantly affects the business’ longevity. That’s because effective communication is critical to building one of a family business’ most valuable assets: trusted relationships. These are often underappreciated, but they help generate three important things:

— Financial capital: committed owners who have an emotional connection to the business and value long-term performance.

— Human capital: engaged employees and family members, including spouses, who bring their full talents to their work and the family.

— Social capital: a positive reputation with customers, suppliers, the public and other stakeholders, which can help differentiate you in a crowded marketplace and build partnerships across generations.

How will you handle the transition to the Next Generation?

The final right of owners is deciding how to exit. You can choose who will own the business next, what form that ownership will take and when the transition will occur.

To execute a successful transition, you’ll need a continuity plan that maps a path from the current generation of owners to the next. It should address three main challenges:

— Passing down your assets. Will you keep the same type of ownership or change it?

— Handing off roles. How will you create the glide path necessary for the current leaders to let go?

— Developing next-generation capabilities. What skills will each of the new owners need, whether they actively work in the business or not?

Without Hard and smart work by the owners, other family members and employees, family businesses often implode. By applying the five-rights framework, you can organize yourself for the work that family ownership requires. Ask the members of your business to individually assess your performance against each right. Then share the results and develop a plan that builds on your strengths and shores up your vulnerabilities. Only through such collaboration can you use the power of ownership to sustain your family business for generations to come.

Josh Baronisa co-founder and a partner at banyan-Global family business advisor san dan adjunct professor at Columbia business school. rob lac hen au er is a co-founder and the CEO of Banyan global. they are the authors of“the Harvard business review family business Handbook.”

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