This article appeared in the July 2018 issue of MiMfg Magazine. Read the full issue and find past issues online.
Managing a family-owned business can often feel like the world’s most challenging balancing act. Executives must maintain a future-focused approach to the business with an eye for revenue, investment opportunities, and business growth. Yet combining family with business adds new challenges to the already-complex difficulties of manufacturing.
- How do I stay focused on the business aspect of a family business?
- When should I pursue long-term strategic planning?
- At what point should the next generation begin to get involved? At what level?
- What if the next generation doesn’t want to be part of the business?
- What should the period of transitional, generation- to-generation leadership look like?
These are just some of the questions executives at small manufacturing firms across Michigan have running through their minds. And with good reason. Only one-third of family-owned businesses survive to the second generation — and the rate of success falls with each generation. According to the Conway Center for Family Business, 12 percent reach the third generation and only 3 percent of all family businesses operate into a fourth generation or beyond.
With so much pressure to succeed, how can manufacturers get the odds back in their favor? What makes a family-owned business work?
Make Decisions Based on What’s Best for Business
Emotional baggage can affect every business decision and family conflicts or miscommunication take on added risk where business is involved. The more you allow personal events to influence your decision-making, the more the business will suffer.
“Open and honest ongoing communication is the best way to maintain alignment between family and business goals,” explains Dennis Theis, director and principal at Maner Costerisan. “Don’t assume your goals are understood by everyone on the team and every family member. Write down the long-term, strategic goals against which all decisions can be vetted. Allowing for measurable results will help strengthen the delicate balance between business and family.”
The appearance of nepotism is something every business owner must work to avoid. Often, a family member may not have the requisite experience or be the best fit for a particular business function. If allowed to proceed, operational issues can arise and cause friction between family members. Undeserved opportunities can also create issues among longtime employees or non-family management and this can be difficult to overcome.
There will always be special considerations made for the family aspect of family-owned businesses, but they should be opportunities earned, not given. Leaders who place emotions ahead of a rational, “what’s best for business” approach can quickly stumble.
The team at Cascade Engineering’s family of companies in West Michigan understand all too well the balancing act that occurs when family and business intertwine. The company makes the extra effort to avoid letting family interests become the brand’s primary influencer. It’s board of directors includes non-family members and non-family hold positions with decision-making power.
“For me, there are enough challenges to running a business — providing value to your customers, creating a trusting environment, being operationally excellent — if you can keep the additional challenges that pop up in every family from influencing day-to- day operations, it makes sense to do it,” said Christina Keller, president of the Cascade Engineering Family of Companies.
Know Where You’re Going: Develop A Succession Plan
All manufacturers should remain future-focused. The uncertain nature of family-owned businesses requires significantly more time spent considering future opportunities and risks. Succession plans can be one essential tool for companies looking for success across many generations of leadership. It can be done for reasons of retirement, death, serious illness or natural transition and involves many components including the financial aspects of ownership, leadership development and the identification of people and models to be used post-transition.
“Succession should be treated as a never-ending process, not an event,” Theis says. “If some aspect of the business is not in a state of transition at any point in time, you may be missing an opportunity to prepare a family member with the experience and/or resources needed to assume future responsibilities. Even if you don’t anticipate a transition in the near future, it should be regularly discussed. While the operational issues of today may seem most pressing, the unanticipated issues of tomorrow could have the greatest impact.”
While essential to any business, the leadership structure of small family-owned companies is notably more precarious and long-term planning can result in increased stability.
“For the family-owned business, your plan development may begin by looking at family members already in the business and considering how they might excel with added responsibilities and the opportunity to develop new skills,” says Chuck Hadden, MMA president and CEO. “If there isn’t a next generation or if they are still quite young, it’s a wise strategy to incorporate plans for an interim leader; someone as committed to the business as you are and someone who could steer the company well once you retire.”
That strategy was implemented by the Cascade team as part of its succession plan. A leader from outside the family acts as a buffer as the transition between generations occurs.
“Our current succession plan has been excellent,” Keller noted. “Through the structure we have, I’ve never had to report directly to my father and that allows us to stay very close and offers me an opportunity to enjoy a mentor-like relationship. It has also been a good sanity check for us that we are doing things that are right for the business and not just the family.”
Succession planning specialists can be found in a variety of ways including financial, legal and human resource consultants. These experts can assist you in developing an overview of the planning process, looking at staffing concerns, considering the plan from a financial perspective and giving you the insight into the challenges you could face.
Discover where you are on the road to succession planning. Check out the helpful Succession Plan Score Card from Gordon Advisors PC.
Keep Them Out, Invite Them In, Let Them Walk Away
The journey from family member to member your family’s business should not be achieved overnight. The mix of business, home and family can overwhelm even the most well-intentioned executives. As the tenure of leadership in family-owned businesses is four-to-five times longer than non-family- owned businesses. Setting boundaries early and outlining clear expectations can be critical to company success and the emotional health of family members. To do this effectively, many business owners demand family members work outside the business.
“My father had an excellent approach to getting us ready for adulthood. He pushed us away from the business and encouraged us to follow our dreams, whatever they may be, and work outside the business for at least five years,” said Keller. “I have heard many stories of people starting with their family business too soon or trying to live their parent’s dreams and in both cases not allowing themselves to fully develop as leaders. I have come to appreciate my time away. It added to me as an individual and fueled a passion to make my family’s company succeed for future generations.”
While many times this break from the family business fuels a deeper interest in returning, you must be prepared for the instances where family members choose to walk away and pursue other goals.
“If the next generation isn’t interested — be it for other interests or wanting to avoid the pressures unique to family businesses — it’s critical you identify the key steps to make the business profitable and self-sustainable,” suggests John Carter of Insyght Transitions Group. “This may include developing a successor management team, documenting high performance processes and systems which are replicable and scalable and implementing a long-term growth strategy. The goal is to create a company capable of succeeding beyond the family’s involvement.”
Be a Mentor and Allow for Change to Occur
When the family does pass leadership from one generation to the next, it rarely occurs with a quick separation. Usually older generations stay on, either in a consultant’s role, as part of the company’s Board of Directors or in an emeritus role. This can provide a clear benefit to the company and to its new leadership when children can utilize their parents’ experience in a rare mentorship role. Where this cross-generational interaction can hurt the business is when new ownership fails to take risks out of fear for what their parents will think or when older generations refuse to allow for necessary changes to take place.
“Each generation has different life and educational experiences and as important as it is for the next generation to learn from the current family ownership generation, it may be just as important for the current generation to be open to and give consideration to the ideas the next generation brings to the business,” explains Theis.
Although statistics show that most family-owned businesses don’t make it, you can use these steps to make yours the exception. By taking a business-focused approach to decision-making, developing a succession plan, not handcuffing family to the company’s future and allowing for change to occur across generations of leadership, your family-owned business will last longer, succeed farther and bring your family closer together as they work toward a common goal.