Interviews

The makings of a successful family business

5 min read

29 April 2014

Successive governments have emphasized small businesses, as they are the life-blood of the economy. If small businesses are the life-blood, medium-sized businesses are the economy’s core, and are mostly family owned.

Because mid-size businesses are vital to the economy, German culture has always encouraged family businesses. Despite their importance, family businesses are not easy to start, build, maintain, and sustain from generation to generation.  

So what constitutes a “family business?” Usually, it is a business controlled and owned by one family and started by a visionary entrepreneur – someone who is unreasonable, charismatic and driven, but with real commercial acumen and a single-minded determination to succeed. For them, failure is not an option.

Successful family businesses prosper, diversify and adapt to change. They can become major employers, operate internationally and generate many millions of pounds of revenue. Unless businesses have international scale, they will not survive.

Various family members may be employed in the business, and some may have senior executive roles. Like with any business owner, or family head, for that matter, they must understand that their current decisions affect future generations. How can the business be secured for the next generation?

The visionary entrepreneur would really like to be immortal and to control the destiny of the business until the dawn of time but even for them this is not possible. A succession strategy is needed.

In earlier times, preserving the family business and wealth was easier. The business could be sold at a good multiple to a large public company and the proceeds of the sale invested would produce a meaningful return. With today’s low interest rate, however, even with high multiples and a good sale price, returns on cash are poor.

The cash could be invested in the stock market, but why sell your own business and invest in someone else’s?

It may be possible to list the business on the stock market, but only the largest companies prosper in this public arena, and the extra costs and responsibilities of compliance are a real deterrent.

The visionary entrepreneur needs to concentrate on succession planning within the family. They often begin by thinking about the tax implications of what they might do, but this is the wrong place to start. Instead, they should concentrate on who will actually run the business – will it be professional management, or is a family member sufficiently skilled and motivated? How will profits be allocated and capital divided?

The visionary entrepreneur has a large responsibility, and should document his or her wishes to clarify intentions for the family later on. A family charter should be considered to set out rights and responsibilities. Lines of communication need to be clear between shareholders, whether they be original family members or Trustees.

A clear leader needs to be selected and empowered, no matter how difficult it is for the family to decide. It will not always be the eldest son, it may be the youngest daughter.
The other members of the family need to be looked after, possibly by way of a payment of a fixed preference dividend or a dividend linked to a share of profits. Remuneration levels for executive shareholders need to be settled and agreed upon.

A skilled and experienced non-executive director should be recruited to act as an honest broker, not a grandee from a public company environment, but someone with substantial private company experience.

For visionary entrepreneurs, starting and building a business is just the beginning of the journey. True visionaries see a future for their companies beyond themselves, and proper planning is key to ensuring that they leave a legacy behind at the family business. Open communication among family members and stakeholders, clear expectations from leadership, and an objective third party are three must-haves for a successful long-term plan for a family business.

Gary Laitner is a partner in the London corporate group at international law firm Faegre Baker Daniels LLP. He acts for family-owned businesses and regularly advises them on succession planning issues. 

Related: Four family business myths busted