Pruning The Family Tree: When to cut family members from the business ownership?

Pruning The Family Tree: When to cut family members from the business ownership?

The results of this contentious study into fourth generation family business covered by Tess De La Mare of Campden FB highlights the importance of family governance to provide a mechanism for buying out those who are no longer emotionally committed to the family’s success. Family governance frameworks also provide certainty for all stakeholders in what can be difficult, emotionally challenging environments. David Harland – Family Business Advisor

Successful family business in their fourth generation “prune” out next gens to ensure that only family members Family-Tree-Governace-Ownershipcommitted to the longevity of the business remain within the ownership structure, according to research.

In a recently published report – Good Fortune: Building A Hundred Year Family Enterprise – Massachusetts-based research firm Wise Counsel, aimed to uncover the unifying characteristics underpinning the success of long-term family businesses.

Thirty-eight companies in at least their third generation – all of which were approximately 100 years old – were involved in the study, which was conducted via interviews with family members.

The majority were in the process of transitioning from the third to the fourth generation, and the research found that none of the 16 businesses that had already completed this transition still included 100% of the family members that would have been eligible to be in the ownership group.

Buying out family members, according to the authors, is necessary for succession because it gets rid of next-gens who only view the business as a source of income, and are unwilling to give up short-term profits for reinvestment.

However, shedding family members can be an emotionally charged process, especially if they are unwilling to leave, according to John Tucker, an adviser at the UK-based International Centre for Families in Business.

He told CampdenFB: “There are issues of power and control if there is more than one family involved in the business and issues of fairness and equality for siblings from the same family, and there are also issues of emotional ownership.”

He did agree with the report’s authors when they said that once a member had started to view the family business purely as a source of cash, it was often extremely hard to get them to get them to change their perspective and think long term.

But Tucker said it was very important never to generalise when it comes to a family business, as no two are alike and the will all be run according to the family’s unique management philosophy.

The research, however, claimed to have found several key qualities families behind successful business had cultivated, such as shared family values, a strong family community across generations, professionalised business structures and adaptable business models.

It also cited the free choice for family members to remain partners, the development of human capital and a commitment to philanthropy as essential to the endurance of a business.

Above all, the report observed the intentionality demonstrated by the families behind these businesses, saying they had consciously decided to “become great families” to ensure the future of the business and the family’s wealth – implementing strategies such as mentoring schemes, charters and “cousins’ communities”.

All of the 38 families involved in the Wise Counsel study – who were not named – had a net worth of more than $200 million (€149.6 million) and controlled an international business.

Thirty-one of the participants were from the US, while the remainder were from Europe, Canada, Asia and Australia.

For more information or assistance with family governance contact FINH on 07 3229 7333

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