Setting the family business straight

Operating a family business has special challenges. Richard Cooper and Mike Coleman of KPMG outline how to avoid the pitfalls.

Whether or not family businesses choose to acknowledge it, change is happening. Successful families in business pre-empt and plan for the “what if”’ and “what happens when” events that arise as a family business grows and experiences generational change.

What happens when…

No two family businesses are the same. Each has its own unique mix of family dynamics and business challenges. The dynamics and challenges are not static, and change over time depending on the maturity of the family and the business.

However, while each is different, all of them will have the same predictable family business events which the family will need to address as both the family and the business grow.

This is why KPMG strongly advocates the importance of planning to family businesses in concert with previously agreed family rules to pre-empt how the family will deal with the predictable events if — but more likely, when — they occur.

One family business client put it best when he addressed his siblings in one of KPMG’s family governance workshops, “No surprises … we need to discuss and agree now that when something like this happens, this is how we will deal with it”.

So what do family businesses need to plan for? It is what we often refer to in our family business workshops as the “what if” and “what happens when” scenarios. While far from an exhaustive list, families need to plan and agree on rules around:

  • what happens if a family member wants a job? What conditions should we have in place for the benefit of the family member while also acting in the best interests of the business?
  • as a family, how do we prepare and equip family members to be considered for future management and leadership roles within the business?
  • what happens to family ownership if a family shareholder divorces?
  • what happens on the death of a family shareholder? What happens to their shares?
  • what if a family member wants to sell their interest and exit the family business?
  • what happens when siblings working in the business disagree about expected remuneration and benefits afforded to them by the business?

As you would expect, if these scenarios aren’t planned for and clearly communicated to family members they can cause underlying tension or open conflict within the family. This distracts the family, to the detriment of family relationships and ultimately the success of the family business.

We are not suggesting that there won’t be disagreements and tension along the way; however, by planning and setting clear rules, the family is far better placed to lessen the chance of tension and conflict “paralysing” the family. The family will also be best equipped to constructively manage change.

We are often asked, when is the right time to plan, and what size family do you need to be? Based on our experience, the challenges of a family business are not limited to “large” family businesses. As well, planning under “harmonious conditions” leads to far better outcomes. People rarely make well considered choices in the middle of a crisis, and it is hard to implement rules retrospectively — that is, establishing plans and rules well after the horse has bolted.

Communication is a common issue in family businesses. Sure, it can be an issue in any business; however, where family businesses differ are in the layers of emotion, familiarity, and family dynamics that come with conversations and decision making.

When asked about communication, family members are proud to report that, “Yes, we talk all the time”. But when you scratch below the surface a different picture emerges. Yes, they talk, but have difficulty communicating effectively about issues that concern them and do not have the means to separate family, business and ownership issues. They are muddled together.

So what is the answer? In the interests of maintaining harmony some families fall into the trap of using the silent treatment. But the issue is not resolved; it simmers below the surface, creates tension and builds to a head over time.

“I will inherit this business but our future direction is unclear … it’s all in Dad’s head.” (Quote from second generation family member).

“What am I working towards? I have my own aspirations.” (Quote from second generation family member).

KPMG’s role is often focused on assisting the family shift progressively from “talking all the time” to effective communication.

Here is some food for thought:

  • Effective communication is the sending and receiving of messages. However, often we focus more on the sending part: “we need to communicate more” is misconstrued as meaning “we need to give more information”. But to foster effective inter-personal communication, attentive listening is paramount.
  • Listening is greatly facilitated when the message is transmitted in a proper manner. The message is often lost due to the familiarity of family member relationships. For example, “Oh they aren’t arguing, they always deal with each other like that”.
  • Mean what you say. Be open and transparent with respect to your intentions, motivations, views and reasons for taking a certain position on an issue.
  • Robust debate between family members with differing views can be a good thing provided it is constructive and respectful.
  • Engaging family members in key decisions not only improves the quality of the decision being made, but also enhances the satisfaction and motivation of all concerned, even when the decision taken is not necessarily favourable to them.

Learning to better communicate is a fundamental element for family business success, with the key enabler being structure.

Establishing family and business governance structures defines:

  • Who should be communicating
  • What they should be communicating about
  • When they should be communicating.

Communication, Structure and Planning — bringing the three elements together.

The old saying “the whole is greater than the sum of the parts” aptly applies to the three core elements. Working in unison they generate strong and effective family governance to deliver:

  • respect for each other’s views and ideas
  • trust in family members working in the best interests of the family and the business
  • comfort in the next generation seeing a future pathway and being well equipped to transition into and through the business
  • confidence of the current generation in the next generation’s ability to grow and protect the family capital for future generations.

At first glance you may think this is obvious and simple. However, we observe many family businesses either do not recognise the need for, or the importance of, these three elements. Ignoring these elements may pose a real risk to current and future relationships of the family and the business.