When you're first starting out with your own business, you're likely to be focused more on staying afloat than on contingency planning. But as your family business expands and grows, it's important to ensure that this is done in a sustainable way. Read on for some tips and tricks to consider to grow—and preserve—your family business.
Identify and Manage Business Cycles
A family business that is still being managed and controlled by its founder can feel very different from one that has entered the second or third generation. As one example, business founders are more likely to be willing to sink just about all their profits back into the business to keep it growing, while owners who have inherited or bought into the business after it has enjoyed some success may want to take more of these profits in the form of a salary or bonuses.
Balancing these competing needs and interests can be a challenge that just about every family-run business will face at some point. Business owners should anticipate these struggles and plan for them, such as creating a written compensation plan that provides for a minimum amount of profit to be reinvested before owners can take their cut.
Engage in Succession Planning Before You'll Need It
A business that relies entirely on the skills, knowledge, or publicity of a single owner can find itself in dire straits if the owner passes away or becomes too disabled to work. It's crucial to have a detailed succession plan that will ensure the continuity of business operations even if a key member is absent.
Succession plans can include both "contingency" plans (or those employed only in the event of an emergency) as well as "proactive" plans that anticipate the founder's eventual retirement. Having a written succession plan can also make it easier for business owners to engage the next generation, in contrast with vague promises of a future inheritance.
Evaluate the Need for Business Growth versus Control
As a business grows, it becomes increasingly harder for its founder to engage in the same level of control over all aspects of the business operation. For some, the "control" prong wins out, and the business remains fairly static in size as the founder/owner continues to run it. But these types of businesses can be tough to pass along to the next generation, as so much of the business's identity is tied up in the founder's identity.
This means that, at some point, a business founder must cede some control to others. This often requires the business to formalize its structures and procedures as part of the professionalization process. Professionalization can be a frightening thought to some founders, but it doesn't necessarily mean it's time to pass the management baton to non-family members. There are six pillars to professionalism1 in a family business:
- Recruitment, training, and retention strategies;
- A decision-making framework;
- Strategies to strengthen the family's discipline and commitment toward the family business;
- A respect for the management hierarchy, with structures that can empower employees to make decisions;
- Systems that ensure consistently high performance and fairness among all staff; and
- Guarding of core values.
These professionalism measures can help reduce the potential problems associated with nepotism and conflicts among owners and managers, all while helping your business attract and retain the best candidates—family and otherwise.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. 1 https://cfeg.com/insights_research/professionalizing-the-family-business-its-not-what-you-think-it-is
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