Welcome to another edition of The Wealth Office.
In the previous edition, we proffered solutions to several concerns and pain-points our clients have raised with us. The solutions proffered covers the following spectrum of our services – from Wealth preservation, Corporate Governance, Corporate Administration, Family Office set-up; Estate Planning Advisory and services.
In this edition, we are discussing “Professionalizing the Family Business”.
According to Wikipedia, a family business is a commercial organization in which decision-making is influenced by multiple generations of a family, related by blood or marriage or adoption, who has both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals. Family businesses are usually based on a value system that is mutually subscribed to by all the members of the family across generations and which is also the factor responsible for its many achievements and impacts.
Statistics have shown that the total economic impact of family businesses to global GDP is over 70%. Family businesses are the most frequently encountered ownership model in the world and their impact on the global economy is tremendous. For example, family businesses in Europe create over 5 million jobs representing 40 to 50% of Europe’s overall employment (KPMG, 2013). Also, Most of the Middle East’s GDP, more than 80% of businesses, even outside those in the oil sector, are either family controlled or family-run (PWC, 2012).
Despite these tremendous economic impacts, statistics have also shown that merely 30% of family businesses make it to the 2nd generation and perhaps a smaller percentage make it to the 3rd. Usually, family conflicts are the spur of this disappointing fact. However, another factor may come into play – lack of professionalization of the business.
Professionalization has been defined as a social process by which any trade or profession changes itself into a genuine profession of the most striking uprightness and competence. Professionalizing a family business entails the adoption of the structures, governance, systems, and processes of a modern corporation. For every founder of a family business, there comes a time when the founder is at a crossroad – on one hand, there is the intention to keep things in the family and on the other, there is also the need to scale the business. When that happens, experts have always advised that professionalizing the business is the solution. Contrary to the understandable phobia that professionalizing the family business removes the family from its role in the business, this position is not true as professionalizing the business only seeks to augment the family’s unique attributes with the features of a modern business organization.
There are, however, some factors to be considered before professionalizing the family, namely:
1. Identifying the distinctive values and attributes of the family business
The values of family businesses are their unique identities and signatures which is the foundational pillar and the essence of the business in the first place. They are the very first products of the businesses, hence, they must be holistically identified and protected. This can be achieved by facilitating the articulation of the intentions of all stakeholders in the family, across generations. This would prevent the manifestation of conflicting values in the operations of the business which may be detrimental the growth and overall success of the business.
2. Knowing When to Professionalize
In the formative years of a family business, the challenges it is faced with are mainly external and market challenges – getting access to capital, defining the right strategy, and gaining a competitive advantage. Like a child, its priority is to survive and gain balance. At this stage, a Founder (the Patriarch) drives the business with extraordinary passion and insight.
But growth comes at a cost. As the business grows and scales, it becomes increasingly hard for the Patriarch to manage it effectively, hence, the need to professionalize the business arises.
Professionalizing often associated with moving a business to the next level. A Founder of a family business should consider professionalizing in the following circumstances:
- When the business is experiencing rapid growth;
- When a co-investor or partner comes on board;
- When the family business re-structures, especially when it becomes a big corporation e.g., a public limited company;
- When external managers are recruited in the business;
- When there is a hand-over from the Founder to a next generation family member.
How to professionalize a Family Business
Professionalization is about strengthening a family business rather than turning it into something overly complicated which doesn’t suit the family’s objectives.
Some of the key points on how you can achieve professionalization within your family business, include the following:
- Define the role of the family in the Business
To professionalize a family business, members of the family must, first, clarify their vision for the future of the business and for themselves. Then, they must define each generation’s specific role in the business as well as their individual roles. This is very essential to achieving their objectives.
- Establish a Governance Mechanism for the Family Business
Instituting a proper governance structure for the business is also a strategic measure towards professionalizing the business. All the managements components of the business must be strengthened – the family must decide on how it will be governed and how it will manage its relationship with the business; the Owners council/assembly as well as Family council/assembly depending on the size of the owners and family members should be set-up and operational. The roles of these organs must be clearly defined, while the Board of Directors must be created and fortified with, perhaps, a non-family member who can provide valuable insights and support decision making.
Many countries have statutory and regulatory requirements relating to the governance of the Board of Directors; therefore, family businesses should strive to comply with these requirements.
- Develop and Document Business Policies and Procedures for all Processes
Founders of family businesses may consider drafting a document that contains a set of rules and policies for the smooth operation and management of the Family, e.g., a Family Business Constitution.
Merits of Professionalizing the Family Business
The benefits of professionalizing the family business are unexhaustive and they include the following:
it ensures better governance structure for the family business.
- It promotes comprehensive financial management of the business.
- It ensures adequate research which facilitate a wider range of products and services or the business.
- It assures the alignment of the values and aspirations of all members of the family while ensuring that the family business scales.
- It promotes efficient and effective service delivery system of the business
- It aids better branding and greater brand awareness for the business, and finally,
- It increases the efficiency, profitability and, ultimately, the overreaching growth of the family business.
At some point in the life cycle of every successful family business, it becomes imperative to professionalize. This can mean a period of instability for both the family and the business enterprise. Sailing through the turbulence requires careful planning and implementation on the path of the family. Most importantly, the family must never lose sight of their foundational values and uniqueness which must be clearly and explicitly articulated, communicated, and institutionalized, with the goal of preserving them as guiding lights into the future.
Family-built businesses that are strengthened using the right supporting elements of a modern business organization will create a successful business empire that will flourish for generations to come.
Thank you for your time and remember that we are only a call or email away from answering your questions or providing clarifications on the subject. You can send us an email email@example.com or call +234 803 7265 961.
- A Founder’s Guide to Professionalizing a Family Business
SEPTEMBER 06, 2017
By Vikram Bhalla and Christian Orglmeister
- Wikipedia – The definition of Professionalization https://en.wikipedia.org/wiki/Professionalization
Professionalizing the Family Business, KPMG Nigeria, published on 3 July 2017 https://home.kpmg/ng/en/home/insights/2017/07/professionalising-the-family-business.html
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