HOW TO THINK ABOUT SUCCESSION

Rodney: There’s no tried and true method of ensuring that the succession of a family business down to the next generation is going to have a positive outcome. But there certainly are things, depending on the size of that business, that you might want to make sure of. Like, for example, you know, if you’re running a business and it gets to a size where it has a life of its own, don’t automatically assume that the next generation in your family are the only ones who can run that business. And better yet, are the right ones to run that business. If you make decisions for your business that are in the best interest of the business, then you’re going to end up making the right decisions. Now, there often are times where having a family member involved in a business in some instances is the right thing for the business because of the optics and or the perception of clients of that business. But you’ve got to make sure that whoever it is that’s succeeding you in business is prepared.

WHY A SHAREHOLDER’S AGREEMENT IS IMPORTANT

Rodney: A lot of family run businesses that are started by two brothers or three brothers or two cousins or husband and wife, take for granted that they’re a family. And often don’t put in place a proper shareholder’s agreement or a proper succession plan  because they take for granted that they’re family. 

And then as the business progresses, family member A may think where the business ought to go is different than where family member B thinks the business ought to go. In most situations, where I’ve seen these things go the wrong way, there hasn’t been a good shareholder’s agreement in place to guide exiting the business, or a good guide to succession. Good shareholder’s agreements actually deal with that. 

Even where there is good shareholders agreement, force of wills tends to take the overriding factor in creating and or resolving the types of issues that come up. It’s family running a business as opposed to the business being the underpinning of the family. And often it’s the latter that happens where the business runs the family as opposed to the family recognizing that we’re running a business.

THE IMPORTANCE OF SETTING UP A BOARD

Rodney: The best way to ensure the success of a business beyond the founders is to put in place a good solid board structure. A board has a mandate that is different than that of the founder. The mandate of a board is the success of the business – the  best outcome for the business. The ultimate objective of a founder may be very different. And so an organization that is thinking about succession, and does not consider a board structure is leaving out something that’s critical to success.

I would think something that’s very important to consider when setting up the board of a family business is general board principles and board frameworks. Don’t run the board as sort of “to do” as opposed to having a purpose for the board. Take the time to understand the board’s purpose and its role. And take the time to create a framework that’s not inconsistent with running any good business and applying and adapting it to your family circumstances. If you do that, you’ve got a much better likelihood of success. Sometimes the family issues bleed into the business decisions and then they bleed into the family issues. That’s when, depending on the size, a business needs to think about having an outside board member, an outside board member is not a family member. And can therefore bring a set of fresh eyes to the conversation that as a  family member deeply ensconced in an issue is unable to deal with.

EVOLVING A FAMILY BUSINESSES TO A BUSINESS

Rodney: We try to take a very objective approach to identifying the necessary skills for the jobs or roles in question –  for understanding how an organization makes the transition from a deeply entrenched senior management “founders” to the next level of management. We bring them the best practices and we bring them standard role definitions and job descriptions. We spend a lot of time with them talking about the nuances of a family environment in the context of these best practices and well-defined roles. And with trust built, it becomes a much easier discussion.

ADVICE ON RUNNING A FAMILY BUSINESS

Rodney:  When I go into a family business, my observation is that you often have jack-of-all trades with founders and family members. When you’re playing the role of a family member, understand that it’s distinct from your role as a board member, or shareholder, or manager. When you’re in the role of management, and you’re dealing with management decisions, try your best to recognize that there are three distinct roles. Recognize that you can never separate them or even separate from them. We spend time with family members in these situations to show them the difference between the role of a family member, the role of a board member, the role of a shareholder, and the role of management. And once you fully understand those roles, you can have those conversations. In those conversations, you are conscious of who you are speaking to.  Am I speaking to you, the shareholder, or am I speaking to you as the director? So when you’re dealing with difficult issues, you know who you’re having a discussion with. 

FINAL THOUGHTS

Once we have the trust of the individuals involved in the situation, and they see examples of what’s worked in the past, what’s not worked and what’s failed, it puts us in a good position to work with them to make the decisions that are going to get them to the right place in the long run.