Adding Some Formality to the Family Business

By:  Jack Ellsworth

Most family businesses start out with one person who wears many (or all) hats:  owner, general manager, sales manager, CFO, head of administration, etc.  There is a certain simplicity in having one person handling all decisions and the lack of formality and bureaucracy tends to work well ~ at least in the early years in the life of a family business.  As the next generation becomes more involved in the management of the business, the informal structure that worked well in the early years no longer seems to work quite so well.  Big picture decision-making becomes much more complex when multiple people and multiple generations are involved.  Harmony within the family and the business is harder to achieve.  In order for the first-generation business to successfully transition to a multi-generational business, it will most likely need to consider adding some degree of formality.  There are many ways that a business may consider formalizing its structures, and choosing which formalities and structures are appropriate depends on the particular circumstances of each individual family and business. The following are four examples of items that might be considered by family businesses interested in a successful transition involving the next generation. 

1.  Articulate a Clear Vision. We recommend that the family business consider developing and articulating a mission statement clearly defining its vision for the family and the business and drawing up a written business plan establishing the specific strategy to fulfill this vision. The vision of the family and the business are aligned in this process.

2. Define Roles. As management duties are divided within a family business, the roles and responsibilities of members of management should be clearly defined and documented. In addition, it is crucial to determine how decisions will be made within the management team ~ especially in instances where there is not consensus. Defining these roles and responsibilities and the decision-making process helps facilitate harmony in the family and the business.

3.  Establish Rules of Entry. Family businesses should consider establishing specific rules of entry for family members who wish to join the business. These rules should outline the minimum qualifications, education requirements and previous experience required to join the company. Applying these rules consistently ensures that the family business has qualified participants and avoids hard feelings due to perceived favoritism.

4.  Hold Formal Meetings. Formal meetings tend to be avoided in a family business setting because such formalities run counter to our notion of the family. However, holding formal meetings on a regular basis to discuss operational, strategic and administrative issues and to monitor the business’ adherence to its mission and business plan will improve communication within the family and the business and keep everyone moving in the same direction. Having an outside advisor assist in facilitating these meetings can be very helpful in making them most productive.

Most will agree that the informal nature of a family business is one of the things that people find most attractive and limited bureaucracy is refreshing.  While a family business naturally wants to maintain elements of this informal nature, as it matures and multiple generations become involved, certain formalities may need to be introduced to protect both the business and the family so that it can prosper beyond the current generation.

For more information on Cottrill Arbutina’s Business Succession & Exit Planning services or for a complementary consultation, please contact us.