From a patriarchal structure to a cousin consortiumLEARN MORE
Issues involved in passing family businesses on to the third generation and beyond
Family businesses form the bedrock of our economy's industrial fabric. They frequently have the advantage of following a long-term management approach, having a brand image associated with a charismatic founder, and giving staff a strong sense of belonging.
These companies generally benefit from a clear strategy and short decision-making process, making them better able to withstand crises. However, the major challenges for these family companies often lie in the risk of family conflicts and the need to organise the handover of operational control and shareholdings. According to research, up to 90% of family companies do not survive as far as the third generation.
Family businesses start with the founders' individual drive. They adopt a highly centralised management style based on the creator's values and vision. The handover to the second generation is often quite natural, even if the patriarch has not necessarily planned it. Indeed, brothers and sisters generally agree on how to manage the family business. Usually employed by the company, children give a degree of continuity to the patriarch's principles and vision, applying a more structured management with better understanding of risk.
However, it is much harder to ensure continuity in the family business once it reaches the third generation due to the higher number of family members as well as the physical distance and cultural differences that may lie between them. The need to establish a clear family governance becomes all the more important in order to manage what we call the "cousin consortium".
Depending on how many children and grandchildren the original owner has, the number of family members can soon become very high, not to mention any partners and spouses. If each member of the family has to work in the family business, the company's financial ability to pay them may quickly be in doubt.
And at a personal level, cousins naturally have quite different character traits. Unlike the second generation, in which individuals have been raised together and imbued with the founder's spirit, cousins are often geographically distant and have grown up in culturally diverse environments or with alternative values that bear no immediate relation to their grandfather's or grandmother's.
Family conflicts can arise as the company may not necessarily be able to cope with the greater number and diversity of family members. Fundamental questions result: who is directing the family business and who owns it? Who has to work there? Which skills must these people then show? On what basis should their pay be determined?
Clashes can soon occur between those wanting to see the business stay in the family, and others who would prefer to sell it and invest the proceeds in other personal endeavours. Even if the company remains in family ownership, there can still be a conflict of interest between active participants who generally want to reinvest profits in the family business, and non-active participants who would rather see these profits paid out. Family members' individual salaries can also be a source of conflict and may be disputed by the silent familial partners.
The second generation's role therefore consists of not only taking over and growing the family business, but also planning the company's handover to the third generation, taking into account the numerous risks and challenges inherent in the more complex nature of relations between the founder's grandchildren.
The first key step in organising family governance is to draw up a family pact setting out the main aspects of this governance. In particular, the family pact will identify:
The family's entrepreneurial vision and values, which should last through the generations and guide their decision-making principles;
How decisions are to be taken between the different branches of the family tree;
The conditions for selling shares in the family business along with any right of first refusal or prior agreement in favour of family members;
Methods for valuing the company if equity interests in the family business are to be sold, or money has to be borrowed from outside;
The terms for setting the pay of active partners in the company to limit disputes;
The conditions for family members to take up managerial roles; conflict resolution methods.
Family governance tools will then be used to implement the pact. These may include:
A family board to represent the various branches of the family tree and liaise with those managing the family business. Indeed, there must be a distinction between decisions concerning management of the business, which are to be made by the board of directors, and discussions on family arrangements, which are the family committee's responsibility;
A remuneration committee to establish a clear pay policy for family members who are active partners in the business, determine job eligibility criteria, draw up training and career plans for future family managers, etc.
A family governance model generally results from a long process in which the family requires the support of independent experts.
There is no single, pre-established solution: each family has its own issues and each one its own pact.
The keys to the success of any family governance model will always lie in the hands of the family members themselves.
These keys notably relate to various factors:
BNP Paribas Wealth Management Switzerland, which has historically supported a complex, demanding client base made up of entrepreneurs and large families, is a renowned expert in structuring family wealth, in particular through its Wealth Planning Solutions team, named Best Wealth Planning Team 2016 by a panel of professionals at the Wealth Briefing Swiss Awards.