How to keep a family business in a proper way

02.03.2016

First children must gain their experience outside the company, but there is no point, however, in delaying the transfer of managerial rights to the heirs. You should work together at least 20% of the period of time, during which you have been heading the company.

семья-бизнес

I started thinking about how to build a family business (which is owned and operated by the family members) many years ago. At that time I already had a family business with my wife, and three children from different marriages (there are four children now). So the question arose, how to integrate them in business, how to teach them, how they should interact with each other. It became clear that I had to learn that thing somewhere for the reason that nobody could provide such knowledge in Ukraine.

I began to study the peculiarities of doing family business using all sources available to me: I read the thematic literature; in 2003, I entered for that sake the IMD business school in Lausanne. And I even finished the Family Business EMBA at Kennesaw State University. A little bit later I noticed that my friends when meeting discussed their family a lot. The business in Ukraine in the 90s was in its infancy and the majority of the founders had the children who just came of full age by that time, so they should have been involved in the business management. We were approaching the threshold of twenty years, when the owners created their start-up capitals, formed the assets. And given the fact that there were changes of regimes, the government crises and revolutions, the founders realized the need to overhand their businesses. Because after all they will not be able physically to remain the CEOs of their companies. These batteries began to lose power.

Then I realized the need to unite, to share experiences. And having learned in 2008 of the Association Family Business Network, I decided to set up its representative office in Ukraine. I applied, made a business plan, and in 2009 we were accepted. We became the 23rd country of the world that entered the World Association of Family Business Owners. We were the only chapter among the former CIS countries. Our Association of Family Business Owners in Ukraine includes over 50 families, and in general in Ukraine, hundreds of thousands of businesses are the family ones. It is of great help for me as well. Each of us begins to understand the own business much better when communicating with the other founders. They face different problems, the worst of which can lead to the destruction of the company. But let us consider those concerning the relations between parents and children. There cannot be any one-size-fits-all recommendations, in each case a decision is individual and depends on the founder, so I’ll share my vision.

The founders should delegate the business management to their children in time.

Many businessmen are afraid to transfer business to children, to let it go. In America, there was a study conducted, and they found that the businessmen are scared that the next day their lives will end, that their financial security will be sent reeling. But none really died, and the financial security is another zero on your account, even if you have a million. There is not a single person in the world that has a complete financial security. Basically, the owners are afraid that such a transfer will shake their status in the family, and they can lose the control over it. But it is important not to drag on when it’s too late to transfer the control over business. And to think in advance when exactly to do it. I think that the way an owner and his successor must pass together, must be 20% of the CEO’s heading duration. This is exactly like the 4×100 relay race. You can overhand the baton only at a distance of 90 to 110 meters, so that the next athlete could accelerate. Such pace should be gained by your heir. If the owner was in the position of CEO for 25 years, the co-administration should make five years. After all, if the control over the company is not transferred in time, the founder of the business risks losing it:  with the age he can be simply unable to continue manage his company properly.

Each heir should work outside the family business for five years

Such a rule is being discussed at the moment in our family. Our family council includes two older sons. We can relegate them some kind of an internship or a job in a store because otherwise they will not feel that it is their business. But they may occupy a solid position only if they are able to prove their worth outside our company. The heir should gain certain experience, earn credibility, so that the other employees wanted to work with your family member. If he cannot cope with his responsibilities, you will have to fire him. And if he gets the external experience, the level he reached will become clear.

It is bad when family members get unlimited privileges not on merit and competence. The modern family business science thought out the word for such a phenomenon: nepotism. It is considered the mortal sin of a family business. Along with nepotism, there are “deadheads” in the family companies who do not want to work but prefer to enjoy all the privileges thought for the heir. It’s less scary for the family business, as it does not destroy the company. But it can gravely worsen the family relations.

This is the supervisory board that can determine whether your heir should occupy the CEO position. It happens that the heir is not competent enough to run a company. But you can always bring him up as a responsible owner, also by means of introduction him into the supervisory board. But you should not make him CEO. CEO who does not belong to your family could be a good business mentor for the heir before the final transfer of control over your company to him.

Family constitution

We intend to register the most important things that are necessary for doing business, etc., in our family constitution, we are working at. These are hiring and dismissal of the family members, their remuneration, and the process of the company transfer. It comprises also the time point when the children might enter the family council or become the members of the company’s board of directors. For such a constitution, you need favorable circumstances and good relations in the family. You cannot write it alone, it is necessary that all the others would be also interested in it. We have created a family council, which consists of me, my wife and the eldest sons. Twice a year we meet to discuss the plans and achievements. We speak also about the failures and what we were not able to reach.

In our association, there are five families now that have also decided to create a constitution. We exchange information on how it turns out. We translated into Russian the book by John Ward “Preparing a successor for leadership in the family business.” It contains recommendations on how to prepare and write such a constitution. We gave the brochure issued within the Association to those who wish it. We watch how people are hustling things on. Families first must gather to discuss business issues – they have not got used to it. You can start not with the constitution but rather with the writing of a certain protocol, declaration of intentions. You can register, what kind of education family members should have before they start working. Also, you can draw a family genogram. That is, your family tree, from the founders-parents to the youngest heir!