12 Secrets to Family Business Success

12 Secrets to Family Business Success

There are some family businesses that have been around for 100 years and continued to thrive under the leadership of 5 or more generations. But they are rare – as rare as a child who loves basketball making his way to the NBA.

So notes John Messervey, an organizational behavior consultant who counsels high wealth families through very difficult conversations about their family dynamic, their family business, and their hopes for the next generation.

His years of experience working with family businesses and entrepreneurs led him to develop these 12 lessons for family business success:

1. A respected leader must emerge in each generation.

You can’t — or shouldn’t — force someone to take the helm, Messervey says. The long-term success of the company requires a succession process that allows the right family business leader to rise to the leadership role. It’s healthier for the family and well as the family enterprise.

If it’s a forced march, whether it‘s the second generation, the third generation, or the tenth generation, you’re asking someone to give up their individual dreams, hopes and aspirations for the good of the family, which will never work, Messervey says. 

2. A vigorous evaluation of “what do we own and why do we own it” should be conducted each year.

Peter Lynch, the legendary manager of Fidelity Investment’s Magellan Fund from 1977-1990, famously extolled investors to “know what you own and know why you own it.”

The same should be required of business owners. Family members should be able to make a passionate case about why they should keep and continue to operate the businesses in the family firm, as well as why a business unit should be sold.

“The most successful businesses buy and sell, buy and sell, buy and sell,” Messervey says. ”If the only reason to own a company is that it’s a legacy business Grandpa started, the world is going to pass you by and the next thing you know, you’re making buggy whips.”

Allen Bettis, an expert in family business governance, recommends that complex family businesses, e.g., those where not all owners work in the company, develop a board of directors that include independent directors who are pledged to hold management accountable, and to look after the best interest of all shareholders. 

Such boards also look to balance the owners need for a return on their investment (Total Shareholder Return) with the company’s need to retain cash for growth. To do this work, a board needs excellent communication with the owners about their needs and wants, Bettis recommends that the shareholders create an “Owners Plan,” which effectively documents and communicates the owners expectations as ‘one voice’ to the board. 

Typically, an Owners Plan addresses the family’s shared vision and values, answering questions such as: Do we own the company because it’s part of the family identity? 

Is our goal to build intergenerational wealth? Contribute to the community? To the world? To ensure the grandkids have a job?

3. Clear guidelines for the entry and exit of the next generation should be established prior to the entry of the first candidate.

“Birthright is not a sufficient reason to qualify for working in the company,” Bettis says. 

There have to be some rigorous standards including defined job description and qualifications, and regular performance evaluations focused on progress and goals. As a way of formalizing this, many business families create a “Family Member Employment Policy” drafted with input from top management and approved by the board and all owners.  

And, Messervey notes, successful family businesses know the importance of setting the rules early. Just as it makes no sense to sign a prenuptial agreement after the wedding day, the succession plan for the next generation of family business owners must be hashed out before the first child enters the business.

Those guidelines should include requiring that the children spend time NOT working in the family business, Messervey says.

“The simplest of guidelines are: You’ve got to get a job on your own, become economically self-sufficient, get at least one promotion in your job with positive reviews, and then be away from the family business for most of your 20s.” he says.

“I think it’s also helpful that you may have a really bad boss. Or a really good boss. You should see what’s out there.”

4. A comprehensive SWOT analysis of market position should be conducted each year.

This goes hand in hand with No. 2. This point is all about understanding the strengths and weaknesses of the company, including the family members and non-family members who are leading it.

Say your brother Al or sister Sally is the CEO. Those family relationships mean that no one wants to rock the boat or demand metrics to measure their performance. 

“As long as the checks keep coming and we’re not in trouble with the SEC, or the FBI or anybody else, you know what? Fine,“ says Messerey. “But that’s not the way to grow a business.“

That includes looking at company governance overall. If the board is made up of mom’s and dad’s friends who never question the business strategy and play no role in decision-making, it is time to bring in non-family members.

Messervey recommends three people, each of whom brings some expertise the company needs, whether that is finance, marketing, or some unique challenge the firm faces. They would be appointed to staggered three-year terms and encouraged to “comment openly about everything, including compensation, metrics, incentives, next generation, everything. And succession planning needs to be an agenda item on every board agenda,” he says.

5. A long term five/ten year ‘future of the market’ for each entity should be conducted.

This is about peering into the future and thinking about what the market, the world and your company will be like in 2032 and what competitive advantages you can bring to bear. Without that kind of crystal ball, the company risks being left behind as the world moves forward, Messervey says.

Bettis, however, notes that this is easier said than done. He worked with one family in the business of storing paper documents in warehouses. As their client companies moved to digitized records, the paper records storage business became obsolete.

The family created a new division focused on paper document shredding services. But that business change disrupted the compensation plan for family members who worked in the warehouse division, resulting in family discord and, ultimately, the sale of the whole company.

6. For trust to be maintained at all times, any improprieties or even an appearance of impropriety must be avoided.

Messervey says he works with two types of family-run businesses. One type is the good, honest, God-fearing type that makes America great. The other is the messed up kind that doesn’t work.

That’s because someone broke trust, he says. And that feels like a punch in the gut.

“Whenever there’s a breakdown in trust, the family business is going to head off the rails. If I can’t trust my family to give me the straight story, who can I trust?”

7. All women must be respected as major contributors to the family business.

Women are better planners, they are better directors, they are more focused and more career oriented, Messervey says.

What we want is the long march for women to be respected and to give them an equal or more than equal role in the business community.” 

That’s not always easy. Bettis tells the story of one family business in which a daughter became the second generation CEO. Ultimately, she gave up that title to a non-family member “who can tell it like it is and not have all the family static that would go with her doing that.” 

She’s now the chairman of the board overseeing an international expansion of the family firm.

8. The long story of wealth creation, difficulties and all, needs to be shared with each generation.

Younger generations need to understand the totality of business ownership. They need to know that entrepreneurship isn’t always easy. They may not need to hear all of the family secrets, but they should hear “about the time they shut off the power, or the workers went on strike, or Dad had to borrow money from Uncle Jimmy,” Messervey says.

The idea is to show the future generations that business ownership requires perseverance. Business success means rolling with the punches, overcoming the setbacks, and putting in the work.

9. Success planning must be a high priority at every board meeting.

Succession planning is a fraught topic at family companies. It is the time when all of the unresolved family stuff comes up.

There are three tricky parts to it:

  • The part about knowing who will take over when Mom and Dad retire.
  • The part about holding Mom and Dad to their own succession plan.
  • The part about business continuity that assures suppliers, employees, and other stakeholders that the company will survive.

Let’s take them one at a time.

Knowing who will take over harkens back to point No. 1 — allowing the right leader to emerge rather than forcing the anointed child to take the helm. Ongoing conversations at the board level allow that to happen naturally.

Holding Mom and Dad to their own succession plan is “the third rail of family business that nobody wants to talk about,” Messervey says. ”Dad or Mom says, ’I’ll retire in five years.’ But they say that every year and it keeps rolling out five years. Meanwhile, the son or daughter is hungry for the bait. But every time they get near the end zone, Dad moves the goalpost.”

Having a real succession plan in place is the key to assuring stakeholders that the company can deliver if there is a sudden change in business management — should dad get hit by a bus, is the child ready to lead? Suppliers, buyers, bankers, employees, and everyone else wants to be reassured there is a plan.

10. A path to cash out stock ownership should be available to all.

“There’s a Malthusian effect of family business, ”Messervey says. ”Dad or Mom start a business and it grows. They have four kids. And those four kids marry. Suddenly, you’re up to eight people very quickly. And to say that everybody has the same degree of financial acumen, business interest, and level of risk tolerance is a fool’s errand. At some point, somebody’s going to want out.”

Putting a plan in place to allow anyone to cash out at any time is the key to avoiding family strife and mayhem.

11. Families need to codify their agreements in writing – ‘Written Understandings of the Smith Family.’

This should be an organic document that lays out all of the discussions that have been had in the family office. 

Start at the beginning with conversations about priorities and expectations. It can include anything that is important, from family ownership to caring for Mom and Dad, to paying for the education of the next generation.

12. If successful families had a motto it would be: ‘No matter what we can work it out.’

This is about perseverance, Messervey says, about not giving up on each other. 

But it’s also about committing to working it out, no matter how big the challenge. It may be serious, but it’s not hopeless. 

And it tells the family and the world: We’re going to hang in there together.