Family Businesses Have Unique Challenges

Family businesses are unique entities that are frequently overlooked in terms of ownership. They also form the backbone of many US and foreign economies; what today are household names, started as family-owned businesses – SamSung, Wal-Mart, and BMW to name a few.

According to a January 2010 McKinsey Quarterly article by Christian Caspar, Ana Karina Dias and Heinz-Peter Elstrodt, “One-third of all companies in the S&P 500 index and 40 percent of the 250 largest companies in France and Germany are defined as family businesses, meaning that a family owns a significant share and can influence important decisions, particularly the election of the chairman and CEO.”

These family-run businesses have special challenges in terms of managing and growing the business: they must achieve strong performance, and they have to keep the family engaged and motivated as the business owner.

The McKinsey article identifies five dimensions of activity that must work well in order for a family business to prosper. These are:

• Family – harmonious relations within and among family members
• Ownership – clear agreements and an ownership structure that provides sufficient capital for growth
• Business and portfolio governance – strong governance, capital structure and new business develpment to keep the company growing
• Wealth management – professional investment management that builds a diversified portfolio and protects the family assets
• Foundations – governance and management of charitable giving that promotes the family values

While a family business often has a different culture than a publicly-held corporation, it must be operated with the same level of management structure and processes seen in large public companies. Retaining the family sense of purpose and values that drive the company’s growth and development is key, especially as it changes hands from one generation to the next.

But what happens when the senior owners are ready to retire and none of the children want to take over as CEO? What do the owners do then? Finding an equitable way to exit the company, transfering ownership to buyers outside the family circle, becomes a critical path that requires planning and strategic execution. Often an outside third party can help in this process, rather than relying on family members to do the planning and find the potential buyers themselves.

If you’re facing this dilemma as a business owner, contact us. We can help you sort through the options and arrive at a solution that works for all family members.