Life Cycle of a Family Business

Life Cycle of a Family Business

Editors

Barbara R Hauser and Alon Kaplan

Managing director

Sian O’Neill

Life Cycle of a Family Business

is published by

Globe Law and Business Ltd

3 Mylor Close

Horsell

Woking

Surrey GU21 4DD

United Kingdom

Tel: +44 20 3745 4770

www.globelawandbusiness.com

Printed and bound by CPI Group (UK) Ltd, Croydon CR0 4YY, United Kingdom

Life Cycle of a Family Business

ISBN 9781787424067

EPUB ISBN 9781787424074

Adobe PDF ISBN 9781787424081

Mobi ISBN 9781787424098

© 2021 Globe Law and Business Ltd except where otherwise indicated.

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DISCLAIMER

This publication is intended as a general guide only. The information and opinions which it contains are not intended to be a comprehensive study, or to provide legal or financial advice, and should not be treated as a substitute for legal advice concerning particular situations. Legal advice should always be sought before taking any action based on the information provided. The publishers bear no responsibility for any errors or omissions contained herein.

Table of contents

Foreword

Dennis T Jaffe

Wise Counsel Research

Preface

Barbara R Hauser

Independent family adviser

Alon Kaplan

Alon Kaplan Advocate & Notary

Stage I: The same but different – enterprise heterogeneity

Justin B Craig

Bond University and Northwestern University

Stage II: The delicate family issues

Thomas M Hubler

Hubler For Business Families, Inc

Stage III: Creating a board for continuity and growth

Allen Bettis

Legacy Associates LLC

Stage IV: Risk management in family enterprise expansion

Wendy Sage-Hayward

Family estate winery, Southern Gulf Islands, Canada

The Family Business Consulting Group

University of British Columbia, Sauder School of Business

Stage V: Protection of the family business assets on divorce

Claire Gordon

Daisy Tarnowska

Farrer & Co

Stage VI: Entrepreneurship in the family business

Peter Vogel

Professor of family business and entrepreneurship

IMD Global Family Business Center

IMD Business School

Stage VII: Leadership succession in family firms

Christian Stewart

Family Legacy Asia (HK) Limited

Stage VIII: Beyond the third generation

Dennis T Jaffe

Wise Counsel Research

About the authors

About Globe Law and Business

Foreword

Dennis T Jaffe

Wise Counsel Research

Family businesses have always been the most prevalent type of business entity worldwide, in both emerging and developed economies. But only in recent decades have advisers and academics begun to try to understand the unique nature of this approach to wealth creation.

Amid the diversity, are there elements or factors common to all family businesses? For this Special Report, the editors asked a group of prominent scholars and practitioners to consider the common themes that arise in businesses owned and controlled by a family. Together, they offer a framework for understanding the complex entity that forms a family business or enterprise.

Two characteristics make family enterprises fundamentally different from publicly owned companies run for financial profit alone:

• A family enterprise is an extension of the family. Family members/owners have grown up together and share personal relationships and often values that go beyond business. They are personally connected, and the dynamics of the family extend into the business.

• Family owners see the business not just as a personal possession to benefit them, but as a legacy that they want to sustain and offer to their children and grandchildren. They therefore look not just for short-term benefit and profit, but long-term sustainability.

They are, in other words, businesses – but more than just businesses.

As the name implies, a family business is a hybrid social system that combines qualities and aspects of both family and business. In early family business research, it was assumed that as a family business matures it becomes more like any other business and sheds, or sharply limits, its family origins. But further research shows that family enterprises seem in many ways to be stronger and more profitable than non-family ones. This Special Report aims to define the ways that family and business priorities can combine to create synergy. By focusing on success factors, the ‘shirtsleeves to shirtsleeves’ notion that business families do not last beyond the third generation can be challenged.

This Special Report is a guide for business families and their advisers on how to make the divergent qualities of a family and a business work together to create strong, effective but also personal, caring, responsible and value-based enterprises. Each chapter represents a different stage of development, or set of concerns, facing a business family as it evolves from a founder/owner across generations. Each chapter, or ‘Stage’, is written by an adviser who has extensive knowledge of all the research in the field and whose goal is to take that research and summarise it in practical terms. Each Stage offers a road map to guide us on another part of the family business journey.

This Special Report aims to define the ways that family and business priorities can combine to create synergy.

The eight stages

Stage I: The same but different – enterprise heterogeneity

To begin, Justin Craig presents a number of lenses through which to make sense of the great diversity of family enterprises. He looks at types of family business and offers models for the common challenges that emerge. A family business by definition comprises two different social systems – the family and the business, each with different goals, values and concerns. The family and its related business is composed of different people, some of whom overlap. The complexity of this hybrid system leads to a need to drill down into the different roles, responsibilities and perspectives.

Justin outlines some perspectives that give substance to this endeavour. The first is that there are three key subsystems in a family enterprise – family, owners and managers. A family member can take on all three of these roles, or one or two of them. The model looks at the perspectives and concerns that emerge. Justin adds to this the stewardship perspective: a model of ownership that seems to be common in successful business families, where members transcend personal self-interest to look at more inclusive goals.

The family business system is continually evolving, as new family members reach adulthood or marry in, and the business grows and diversifies. Justin takes an evolutionary view and suggests that the enterprise must achieve greater levels of complexity over time. He outlines several plans and what he calls a ‘continuity canvas’ that propels a family over time. Various aspects of this canvas are explored in the chapters that follow.

Stage II: The delicate family issues

The family is the foundation of the business. Thomas Hubler looks at the emotional system of the family, and how to address delicate family issues that interfere with effective business functioning. He looks at how the family draws on emotional capital to address personal issues that can intersect with the business. His chapter looks at smaller business families, where business, family and management are shared among a small group of family members crossing generations. Over time some older and younger family members can feel that they are not treated with proper respect or fairness, and these hurts can turn into anger and conflict. Thomas offers examples of how a family can generate and strengthen mutual trust between members, focusing on gratitude for what they share and forgiveness for areas where there has been hurt. A family, he argues, cannot deal with these issues without coming together in family meetings. Thomas shares models for how a family can develop better communication for sensitive issues, and how the family creates a value-based vision of where they are going.

Stage III: Creating a board for continuity and growth

Allen Bettis describes how a board of directors becomes a critical resource for achieving the owners’ goals for the business, by evolving in form as the business and family become more complex. He clarifies the role of the board in relation to management and ownership, and how the board needs to develop higher levels of capability, when marketplace changes demand new business strategies; when there are changes in leadership, for example, a leader’s sudden death; when majority ownership passes to a new generation; or when a non-family CEO replaces a top family executive. Allen also presents how the evolving board manages the interconnection and alignment between the family and the business by encouraging the owners to speak with an informed, collective voice through a family council and by means of an owners’ plan.

Stage IV: Risk management in family enterprise expansion

Family members in a successful family enterprise want to sustain their wealth, and to do that they often try to avoid change. Anxiety about losing wealth and what it entails is connected with the challenges of initiating change. Wendy Sage-Hayward presents an overview the many ways in which risk – the fear of loss – is a continuing concern of business families. Many family members want to minimise risk, but in doing so they forestall potential change in the future. They may avoid immediate risk but create long-term weakness in their portfolio. Wendy’s chapter looks at the many risk factors facing a family as it grows across generations, and offers a model for how to face them openly.

Stage V: Protection of the family business assets on divorce

A family shares resources informally, while in a business ownership rights and prerogatives are precisely defined. In a connected family, everything is shared. When family members are personally connected, they operate the business comfortably, with each person taking appropriate roles and sharing the benefits and profits. But the greatest threat to business continuity is the breakdown of family relationships and trust. This happens most frequently when there is divorce in the ranks of the older generation. This chapter, by attorneys Claire Gordon and Daisy Tarnowska, breaks down how one legal jurisdiction –England and Wales – manages the equitable distribution of family control and ownership upon divorce. The authors explore how, on breakdown of family relationships, legal structures are in place to try to divide the assets fairly in order to ensure the wellbeing of each family member and, hopefully, minimise disruption to the business. These principles are needed to navigate from the personal family system to the business system.

Stage VI: Entrepreneurship in the family business

No business can just coast forward doing what it has always done. The family will grow and require new leadership, and the business can stagnate or decline as it faces new threats. A family enterprise has to adapt to new conditions with each successive generation, continually renewing itself. An effective family business must not just maintain a professional management structure – it must also innovate by offering new ideas, taking new directions and investing in new opportunities. Peter Vogel offers an overview of how business families innovate in many different areas. He presents the different forms of innovation and entrepreneurial behaviour, and the elements that allow a business family to find new ways to create value. A family business has to find ways to emerge from its comfort zone, make investments and initiate disruptive change. There are different types and levels of innovation – in the family, in the business and in ownership dimensions – and a resilient family enterprise has to practise innovation in each of these areas.

Stage VII: Leadership succession in family firms

The founding leader and his successors have to make way for the emergence of new leaders in the next generation. A family enterprise has many aspects of leadership succession that are not present in non-family businesses. First of all, the family wants to see family members, if possible, succeed earlier generations of leaders. But to serve the family, these leaders need to be capable and committed and they have to both sustain the business and practise innovation. A family may not produce a new generation able to lead the business, even if they are owners. Business families after the first generation frequently separate family ownership from leadership, and install non-family leaders. Family members remain as owners on the board and oversee the business. Christian Stewart offers models and considerations that face a family enterprise across generations. He emphasises the need for the family to collaboratively anticipate and plan for their future, and how increasing business and family complexity makes this process more difficult with each successive generation.

Stage VIII: Beyond the third generation

The final chapter is my own contribution. It looks at the family and the business as two separate but interconnected pillars that must both move across generations. While there is great diversity in size, culture and type of business, there are common challenges that face each new generation of family enterprise, arising from their foundation as family businesses. This chapter outlines the emerging challenges in