BEST PRACTICES:

Aligning Family and Business Interests Across Generations

BY MIKE COHN

As families and their business interests become more complex, their planning often must address individual interests and increasing independence, while the family remains connected to a core group of assets. The next generation may not be active in the business, and the business may be run by non-family managers.  What does the family need to know—and do—to balance competing family and business needs? Our experience has taught us that the following practices provide the best opportunities for family members and their assets to successfully grow over time.

Create a Family White Paper
A white paper describes the family’s vision and values and is an exercise in multi-generational collaboration.  It is similar to an executive briefing that outlines purpose, goals (short and long-term), expected outcomes and recommendations for action. A family white paper can be used as a framework to determine whether or not future business and family policies are aligned and consistent.  While the white paper is important, the process of how two (or more) generations work together to create this document is even more instructive about how future generations will address mutual problems.

Outline an Ownership Plan for Major Family Assets
Families often discourage change, preferring to perpetuate an awkward status quo. When candid discussions about the family, its assets, and individual interests are avoided, dissension and conflict often occur.  Succession planning is about change and requires family members to assume and exercise ownership responsibilities, understand risks and make informed decisions about transitions. Change is difficult, but everyone must do things differently to realize the family’s vision and goals.

Create a Structure to Support Family Goals
A Family Council, representing different generations and/or family lines, can provide a forum to address specific needs such as balancing family and business interests; coordinating governance of financial assets; and supporting the development of individual family members.  While one purpose for a Council is to preserve the family’s vision and goals, a Council also may be empowered to nominate, screen and select Board members for the family’s operating businesses, to monitor the performance of fiduciaries and investment advisors, to decide philanthropic initiatives, to resolve differences and to decide family employment policies.  A Council can represent the voice of multiple family lines to unify diverse family interests into a cohesive, consistent voice.

Clarify Roles
Transitions often lead to confusion about roles and responsibilities: for leadership and management of operating businesses, for oversight of family assets, for Board selection, and often for practical decisions (distributions and investments) on multiple trusts and other family entities. How family members are selected for these roles, their qualifications, the terms and the scope of their authority all must be specified.  Sometimes the next generation is not prepared for these responsibilities.  Therefore, the process should provide opportunities to practice how they might handle future situations, perhaps in the form of simulated scenarios.  Needed competencies also can be gained from mentoring, working on particular projects to get experience working across family lines and outside education.

Communicate, Educate, Disclose
The preservation of family values means educating stakeholders about assets and disclosing sensitive information. Some families write confidentiality agreements to protect this information.  Education, however, is more than disclosure about financial assets—it also means building self-esteem, providing opportunities for leadership, for entrepreneurship and for individual expression so family members can lead productive, successful lives.  Collaboration and support among family members does not happen accidentally. It must be practiced through regular communication that emphasizes and reinforces the family’s values and leads to better decisions.

Foster Independence
Many families can thank a successful entrepreneur (or two) for the family’s wealth. Fostering independence, as a family goal, can provide opportunities for family members to succeed on their own. If appropriate, opportunities can be created for family members to start (or buy) businesses via loans or funding from family trusts. These are typically subject to a carefully conceived business plan developed by the budding entrepreneur. One client created an incubator fund that now seeds ideas to help the core business grow. Self-expression can build confidence. Family members can share experiences with other family members and also can give the family an opportunity to share successes.

Provide Exit Options
When individuals feel trapped, they often focus on getting out. When a system is flexible and provides options—to exit or to invest differently, for example—then its members know they have options. Their efforts then can be spent on individual (or their own family’s) development or to enhance the collective interests of all families in the system. Exit options can range from family buyouts to component trusts (sub-trusts as part of a larger master trust) that provide family members with a greater say over how their assets are managed.  Success here cannot be quickly measured or identified. At the outset, this new alignment may be cumbersome and difficult since the family may have years of inertia to overcome. Over time, however, continued enthusiasm and commitment to the process will lead to new behaviors. If the family works toward common goals, their time and efforts will be well spent.