30 Sep 2020
Family Business Planning Best Practices to Consider
If you operate a family enterprise there is a lot to consider when it comes to family business planning best practices.
Family owned and operated businesses are the cornerstone of our Canadian economy. Currently, in BC, more than 75% of businesses are private family owned enterprises. They employ several thousands in our province and across the country and are a key driver in shaping our economic landscape.
Developing strategies for improving the family business and managing these businesses and their inter-relationships with family can be a challenging process for many business owners. How to navigate successfully through these issues is not easy. It requires a broad understanding of how a family run business operates and what are the key areas to keep your focus on.
Let’s take a closer look at some key issues and thoughts that owners should be addressing in terms of family business planning best practices.
What are some of the key challenges of running a family business?
We generally see the challenges in three phases of the family business life cycle.
Phase 1 – Managing Time & Financial Commitment
In the 1st phase, we see the challenge for business owners in managing their time and financial commitment to the business. As you will appreciate, owning and operating a family business often requires a significant time commitment from the owners as well as a significant financial commitment. The challenges that come from this revolve around the following:
- How to meet the needs and requirements of making the business successful.
- How to balance the combination of time and financial commitments around personal and family needs, goals, expectations, and aspirations.
Phase 2 – Managing Expectations of Family Members
As the business continues to mature, we then see some challenges begin to evolve as other family members begin to work in the business.
- How best to address the issues that arise when family members take on more senior roles in the business.
- How do you manage the expectations of the founders against those of the next generation?
- How does one manage the delicate balance of ensuring senior roles taken on by family members in the business are based on merit versus entitlement to ensure continued success of the family business?
Phase 3 – Managing Family Business Ownership Transition
The final major phase of family business planning revolves around eventual transition of the family business to the next generation.
- How should the owner structure letting go and when is the right time to do so?
- Has proper care and attention been given to ensuring the next generation of leaders is properly trained to not only run the business but also lead the business into the future?
Managing a family business ownership transition where not all family members wish to be involved in the business operationally but wish to be part of the future ownership can create interesting challenges as well. These need to be worked through successfully to maintain business success and family harmony.
What are the key elements to consider when looking at a family enterprise/business?
It is important to understand the life cycles of the business owner, the family, the business, and how different lifecycle phases affect decisions that business owners need to make. One also needs to assess their family business from the perspective of the 4 “L” concepts:
- Liquidity - needs for the business and personal
- Legacy – what are the long-term plans
- Lifestyle - desires and aspirations
- Leadership – attributes required to drive business success
When looking at family enterprises and managing for success you need to assess matters from the following dimensions:
Finally, it is important to assess the resources of the family enterprise, the family unity around where they see the business going forward, the technical and emotional capacity of the family to keep the business moving forward and ensuring that the ownership group is in alignment with its support for the business and family for the long-term.
What are some common missteps seen in family businesses?
Every family business faces many challenges and issues. As business owners work through these, they will encounter some common missteps which include:
- Failing to understand the inter-relationship between the family business and the family members and how this may impact the future growth and value of the business. One needs to find balance and alignment from both perspectives, to ensure long term success for the business, but also success and happiness as a family unit.
- Not addressing future family business transition planning soon enough to ensure that the business is properly positioned to transition to the next generation.
- Promoting family members into positions in the business that are based on family ownership entitlements rather than ensuring the right person is put into the position.
- Not recognizing the differences between ownership and management and that these can be separate. You can still be an owner in the business without actually working in the business. Recognizing that hiring outside the family group may be a better decision for the future success of the business.
- Not turning to and working closely with your family business advisors to assist and guide you in navigating the challenges of owning and operating a business and family business planning best practices.
How can family business planning help you navigate these challenges?
First and foremost, we encourage the family business owner to surround themselves with a group of business advisors that will work together with the owner. Having someone in that group who is a trained and experienced family enterprise advisor can provide significant benefits to help your advisory team best assist you from a business and family perspective to manage the challenges noted above.
Owning and operating a family business can be a very rewarding experience. Having qualified family enterprise advisors as part of your team will greatly help you to plan and meet your goals and objectives successfully.
What is family enterprise advising?
Family enterprise advising is all about taking a holistic approach to assisting business owners and their families. It is about understanding how the business and family interplay and influence decision making. A family enterprise advisor will be able to help you navigate this landscape of ever-changing demands and expectations between the business, the owner, and family members. Your advisors will ensure that all perspectives are recognized when you are working through various decisions and directions that need to be pursued.
What is the advantage of having a family enterprise advisor?
Having a family enterprise advisor as part of your advisory team brings you an overall holistic viewpoint to family business planning. They not only understand the challenges of managing and owning a family business but also the connection that family business has with family. Their guidance can help business owners create a lasting legacy of family entrepreneurship for multiple generations.
Manning Elliott Is Here to Help
Owning and operating a family business can be a very rewarding experience for you and your family. It can also potentially provide a lasting legacy for your family to be passed on to multiple generations going forward.
If you are thinking about or currently working on developing strategies for improving the family business or future ownership transition and are in need of assistance, please contact Rick Gendemann at (604) 557-5760, one of our business advisory leaders. We look forward to the opportunity to connect with you to discuss your family entrepreneurship plans and address how we may able to work with you on developing and implementing your strategic action plans.
Rick Gendemann, CPA, CA, is a Business Succession and Business Advisory Leader with Manning Elliott LLP and has a great deal of experience with family business planning best practices. Rick can also be reached by email at firstname.lastname@example.org.
This content is believed to be accurate as of the date of posting. Canadian Tax laws are complex and are subject to frequent change. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.