The question of succession is an emotional and challenging one for every family-run firm with an eye on the future.
We sat down with Barry Goodman, Managing Director of Birkdale Transition Partners, to discuss the ins and outs of entrepreneurial vision, succession, and next-generation family leadership.
How is a family business distinct from a privately-held business?
“It’s important to delineate the difference between the two: privately-held corporate companies are known for their well-established internal structures, whereas family-owned businesses tend to have more flexible structures.
They are distinctly different models and governance philosophies. Family-owned businesses take a long-term view and focus on building longevity through continuity, sustainability and planning for the next generation. Privately-held businesses take a short-term view and often build to sell; in other words, they build value through growth”. However, they share one common characteristic – the need for a highly-qualified senior management team.
When in the lifecycle of an enterprise is it best for an entrepreneur to consider becoming a family business?
The family’s unique goals and values should determine when family members get involved. Generally speaking, the next generation will begin to take on the family values at a young age.
To better examine this question, it is useful to look at the definition of a family business. Many definitions exist, but a widely accepted one is:
❖ The majority of the votes, direct or indirect, are in possession of the founder, those who have acquired the shared capital of the firm, or their family members, and
❖ At least one representative of the family is involved in the management and administration of the firm.
The presence of generational change and the intention of transferring the firm to a family member should also be considered. This moves the definition beyond ownership, management, and control components and embraces the essence of the family business and their intended continuity of ownership.
Family-owned companies change and evolve along with family members and family values, and this deep connection to family values typically leads to a very strong company culture.
Another way to consider the family/private business ownership question is the way in which risk and job role is approached:
❖ Family-run companies strive to ensure corporate health and continuity, exercising careful stewardship over resources and encouraging long-term executive apprenticeship and tenure. Succession planning is a core function of this process. Family business leaders develop strategies and goals to equally benefit the family, business, and self.
❖ Family-owned companies usually have a shorter chain of command than a privately held business, and employees of a family business must be prepared to have multiple roles and responsibilities.
❖ In a non-family business, your role will likely be very well defined. You will know where your responsibilities lie, and which ones belong to other members of your team. Typically, you will also have a straightforward job title.
It is also wise to discuss career pathways – non-family or private corporate career pathways are usually pretty set within the context of the company's existing structure. In a family-owned business, you are more likely to find an “open” career path.
Family-owned businesses are also known for highly valuing relationships, including with employees, customers, vendors, and their community. Strong relationships are the foundation of their success and sustained growth.
Finally, marketing is vastly different between the two models. There is increased interest in positioning and leveraging the “family” in family businesses: the family itself has a brand which is often synonymous with quality, relationship building, and community. This is the magic of family companies, that X-factor, that privately-run firms miss out on.
Basic distinctions between the two forms of company ownership are important in understanding decision-making and building relationships.
What responsibility does a business owner have to their senior management team and staff when bringing their children into the business?
“Bringing children into the business should be approached through family-led acknowledgement of the challenges faced in understanding leadership with non-family employees. This should yield a cohesive approach to education and planning with non-family executives that defines the coming challenges and how to deal with them.
It is all about understanding the nuances, traditions, and dynamics of the business and the family, staying in your “lane,” if you’ll pardon the phrase, and dealing with disagreements and clashes. How do the owner and next-generation owner view the non-family team? What are the rules of engagement going forward? The responsibility must be shared equally, and family succession planning needs to include a reset of expectations.
Finally, it’s easy to say but hard to enforce: the family must treat everyone the same, no matter their role.”
What are some of the most common mistakes family businesses make when bringing the next gen into the business?
“Typically, this comes down to nepotism - giving jobs to family members who lack the fundamental skills to succeed in the role, or inventing jobs for them. Once again, this comes down to expectations and treatment of staff - you do not want to portray a sense of entitlement or an “us and them” mentality with non-family staff.
You can easily avoid this problem by continuing fair leadership, treating staff the same as family, and building the right kind of expectations.”
How does a family align their value systems with their business, and how does this influence how the family develops the next generation?
“We recommend an agile strategy as part of this planning process. Agility is built into the DNA of working in a family firm, so continue this when it comes to communicating and building your next generation of leaders.”
Once two or more generations of a family are in a business, how should a family address a scenario where the needs of the family and the needs of the business are in conflict?
“This is when governance becomes vitally important. Reconciliation is essential, and alternatives need to be approached. I suggest families include non-family executive leadership in the decision-making process, without making anything personal or airing “dirty laundry.” Your non-family executive team will completely understand the emotions attached to generational challenges and disagreements; locking them out is a big way to alienate your team when you most need their help developing solutions to complex issues.”
When does an entrepreneur reach a point where formalizing a process for bringing their kids into the business becomes a strategic imperative?
“Succession is a key issue in every family business, and I suggest that leadership focus their strategy on the intersection of the needs of both the family and the business.
Your strategic imperative must be to make the process of succession as straightforward as possible, and an analysis of key leadership positions should be a matter of continual business practice, not just when considering succession.
Ideally, the goal of the business is to employ the most qualified employees. This means companies should focus on meritocracy; senior positions should not be limited to the family. Family members do not and cannot manage everything, but regardless of their operational involvement, the family can retain their leadership over the company through the Board of Directors.”
H. Barry Goodman CPA CEPA CMAA
Managing Director, Birkdale Transition Partners LLC
I grew up in a business owning family. My father was a distributor of electrical supplies and lighting fixtures in the northwest suburbs of Chicago. Through the experience of working in my father’s business, at a very young age, the challenges of being a family in business are engrained in my soul.
Having chosen not to go into my family’s business, I became a Certified Public Accountant and owned my own CPA firm for over 20 years and then did my own transition to be a founding partner in a firm that grew to become one of the most successful middle-market firms in Chicago. For more than a decade after the merger, I continued to work with privately held companies in many industries. The lessons I learned from the business owning families I served enabled me to gain a reputation for recognizing a business’ strengths and challenges and identifying what could hold it back or push it to the next level. Seeing business owners make good and poor business and transition choices made me realize I had a passion for families-in-business, and I decided to focus my expertise and hands-on expertise experienced on a disciplined approach and process tailored to families and non-family stakeholders.
To better service my clients, I have invested heavily in education. In addition to my degree from Northern Illinois University and being a Certified Public Accountant in Illinois. I became a Certified Exit Planning Advisor, a Certified Merger Acquisition Advisor, and a Certified Value Growth Advisor. I also hold an Advanced Certificate in Family Business Advising bestowed from the Family Firm Institute. I speak regularly to several organizations and business groups on the Challenges and Perils of Family Business, Value Acceleration and Transition-Readiness. I have written an eBook, several articles and published in Family Firm Institute Publication the Practitioner. I also appear monthly to discuss family business on the Morning Blend, televised by TMJ-TV an NBC affiliate in Milwaukee, Wisconsin.