Last week, we discussed exit options for family businesses with intention to follow up with a look at emotional value and how this affects the sales process.
This week, however, I decided to exercise some journalist freedom and change the topic that was planned for this last article in our family business series. Instead of sharing more insights from an advisor's point of view, I invited one of my team members, who joined EY instead of returning to his family's business after graduating from university, to relate his own experience.
This young man continues to impress our team not only with his intelligence, but also with his work ethic and team spirit. His attitude is not typical of someone who does not need the salary or career advancement.
His story illustrates the priceless experience and insight that one can attain from working outside of the family business before returning to it.
This is his personal story:
The average person has a 0.17 per cent chance of dying while hang gliding; a 0.1 per cent chance of dying while motorcycle racing and a 12 per cent chance of contracting cancer if he smokes.
The average family business has a 97 per cent chance of failure past the third generation, according to the Family Business Institute.
As the eldest member of the third generation of my family's business, picking up smoking seems like a good idea right now.
The first time I learnt of that 97 per cent statistic was at the start of my then one-year internship in the transaction advisory service line at EY Caribbean. The number scared me. I always imagined that I would spend a year or two at EY, return to the family business and, at the right time, assume the leadership role. I envisaged that sometime later, my siblings and cousins would join in to support me. The statistics, however, gave me a reality check. I realised true leadership is not so easy ; about 97 per cent difficult, to be exact.
In my introspection, I began to question what the differentiating qualities of the elite three per cent were. Not knowing the answers at that time, I ignorantly consoled myself with the belief that I was destined for greatness and was bound to be part of that elite group.
A few months into my internship, I was afforded the opportunity to attend the EY Junior Academy. This is EY's global one-week training program in Fountaine Bleu, France for next generation family business members. The participants came from over 18 different countries and represented various generational levels.
There was a mix of experiences and ambitions, as many had no interest in working in their family business while others only had family business experience. We were mentored by top business professionals and successful family business owners on innovation and its impact on business. One of these mentors was the CEO of a global conglomerate that manages billions of dollars of wealth. He shared a story that stuck with me months after the trip.
In 2008, his company was months away from being insolvent. He was asked by the family shareholders to take charge after the former CEO of 25 years stepped down unexpectedly. He, as the new CEO, managed to restructure the company and lead a turnaround to bring them back to profitability. He identified two key factors in accomplishing this:
�2 Outside experience: this allowed him to let go unprofitable investments that the previous CEO had been emotionally attached to, and come up with a new objective investment strategy for the group that was based on emerging markets.
�2 Reuniting the family: in order to execute his strategy, he needed to have the support of all family shareholders. He implemented a policy for frequent family events in order to reconnect and redevelop family relationships.
�2 He also made it mandatory for all shareholders to attend the annual shareholder meeting where he would explain his vision for the company going forward.
Afterwards he received feedback from family members so that the entire family could have a unified vision for the future of the company.
After hearing this story, the reality of becoming part of the elite three per cent really hit me and humbled my family business expectations. I acknowledged how unprepared I was to work in the family business, let alone lead it. I learnt that for my family business to be successful and to endure for generations to come, it required a governance structure.
According to Joachim Schwass, professor of the International Institute for Management Development, family businesses are divided into three categories:
�2 The "I": the founder and dominant personality of the business,
�2 The "US": the children;
�2 The "US and Them": the cousins and thereafter.
The real struggles usually arise in the "US and THEM" generation due to conflict of interests between the business and the diverse family members. Balancing the individual needs, wants and ideas of entitlement with business success becomes more difficult with each successive generation.
As outlined in our previous articles, this gives rise to money becoming "thicker than blood."
The values that create a successful family structure are not always in tandem with the values that underpin a successful business. Family is about unconditional love, respect, sacrifice, acceptance of flaws and forgiveness. Business is about growth, success as measured by wealth, and being the best. This is where the opposing dynamics can create family disputes and the core family values that bind families together are replaced by conflict, if not properly managed.
The two sets of values need to "dance" together, not only to ensure success of a business, but to ensure unity. I have learnt that one of the most powerful tools to achieve this is a family constitution. This creates the structure; the rule book that governs the code of conduct during and outside of business hours. A family constitution is thus intended to protect the legacy created by the founder.
A family constitution illustrates a family history, with a mission and purpose, along with values and rules that govern the behaviour of each family member. A successful constitution should include:
�2 Family history, vision and philosophy
�2 Governance of shareholders
�2 Family representation on the holding company board
�2 Family employment policies
�2 Family personnel policies
�2 Family human capital policies
�2 Conflict resolution mechanisms
�2 Emergency planning guidelines for family or business crises
A year has passed since joining EY and I often think about the disaster that could have happened had I gone with my original plan to join the family business without the relevant knowledge, or even a constitution in place.
The family business could have suffered from loss of key employees due to the undeserved role I may have gotten, poor decision making due to my lack of experience, and potential conflicts of interest with other family members due to the lack of defined roles. This may have just been the beginning as the confusion would have grown when other cousins joined in and we just might have been another 97 per cent statistic.
This brings me back to my original question; what is it that separates the three per cent of successful third generation family businesses from the 97 per cent?
After intense deliberation, I have come to the conclusion that it comes down to primarily two factors:
�2 Preparation: this allows you to put the structures in place to manage the competing forces between family and business, such as a family constitution.
�2 A unified family vision: this allows for family members to put their self-interest aside and act for the greater good of the family and the business.
Marrying these dynamics allows you to unlock the greatest strength that family businesses have over regular corporations: longevity. Corporations tend to think within five- to ten-year horizons, whereas family businesses think toward generations ahead.
I came to EY with a plan of leaving after a year to return to my family business. After my exposure to the potential challenges of leading a family business, my plan has changed. My time away from the family business will be extended until I believe I have reached the right level of professional maturity and can really add value on my return. This decision rests upon my great-grandfather's words:
"If you do not have the capacity to be, then you should not be."
Conclusion
In summary, as the bloodline thins and more generations share the "pot", the longevity of the family business becomes increasingly challenging. Wealth should not replace the core values that make families special. The keys to arresting disputes are:
�2 Prepare and govern the family business with a structure that can guide, lead and unify all members with an agreed vision
�2 Focus on what is best for all members
�2 Structure dispute resolution mechanisms, exit options and buy out triggers
�2 Bind yourselves with a legal agreement that is signed by all members so that disputes can be resolved
Family businesses are a valuable segment of our business landscape. With an investment in preparedness, they can continue to contribute to the growth and success of our regional economies and have a fighting chance to increase the three per cent statistic.
This is the third and final article in our family business series. For more articles and insights on global and Caribbean family businesses, contact Maria Daniel at maria.daniel@tt.ey.com.
About the author
Maria Daniel is EY Caribbean's family business leader and a partner in its transaction advisory service line. She has more than 20 years of experience as a chartered accountant and financial analyst and has led several high-profile engagements. She has provided clients, from multinational corporations to family businesses, with advice on raising both debt and equity capital as well as strategic options analysis towards maximising shareholder value. She specialises in business valuations, transaction support services on both the buy-side and sell-side, mergers, acquisitions and divestitures, independent business reviews, restructuring, strategic advisory services and turnaround advisory.
She is a chartered financial analyst charterholder. She is also a fellow of the Association of Chartered Certified Accountants.