We recently attended the Transitions West conference hosted by Family Business Magazine. The event brought together representatives from nearly 100 family businesses of all sizes. Through the educational sessions and informal conversations during breaks, we came away with a better appreciation of the joys, stresses, privileges, and responsibilities which come with stewarding a multi-generation family business.
While every family is unique, a few common themes and/or concerns stood out among the attendees we met:
- Shareholder engagement: How many of your second cousins do you know? As families grow into the fourth and fifth generations, common ownership of a successful business can serve as the glue that holds the family together. However, as the proportion of non-employee family shareholders increases, maintaining productive shareholder engagement grows more challenging.
- Communication: Effective communication is a critical for any relationship. Multi-generation family businesses are complex relationship webs. Identifying best practices for communicating effectively with family shareholders was a common objective for conference attendees.
- Distribution policy: Hands down, the most frequent topic of conversation was establishing a distribution policy that balances the lifestyle needs and aspirations of family shareholders with the needs of the business.
- Investing for growth: The flip-side of distribution policy is how to invest for growth. Can the family business keep up with the biological growth of the family? Is that a desirable goal? Regardless of the selected goal, family business leaders are concerned about identifying and executing investments to support the growth of the family business.
- Diversification: A striking number of the family businesses represented at the conference had diversified rather far afield from the legacy business of the founding generation. What are the marks of effective diversification for a family business?
- Management accountability: Evaluating managerial performance is never easy; adding kinship ties to the mix only makes things dicier. The family business leaders we spoke with were eager to develop and implement effective management accountability structures.
- Management succession: Whether it comes simply through age or as a result of poor performance, management succession is somewhere on the horizon for every family business. By our unofficial count, most of the family businesses in attendance were still led by a family member (often enough by so-called “married-ins”). A meaningful minority, however, had professional (i.e., non-family) management teams.
- Next Gen development: Rising generations are naturally more diffuse than prior generations, with regard to geography, interests, skill sets, and desires. Family leaders were interested in identifying appropriate pathways for next generation leaders to engage, learn, and grow in their contribution to, and impact upon, the family business.
- Generational transfer/estate planning: Attendees were keenly interested in tax-efficient techniques for transferring ownership of the family business to succeeding generations. While certainly important, there may be unanticipated pitfalls if estate and other taxes are the only factors considered when transferring wealth.
- Evaluating acquisition offers: There’s a definite selection bias at a family business conference: attendees are necessarily shareholders of family businesses that have not been sold. Even if the family does not plan to sell, credible acquisition offers at what appear to be attractive financial terms need to be assessed. Family business representatives were interested in learning how best to evaluate and respond to such offers.
- Share redemption/liquidity programs: There are many reasons family members may want to sell shares: desire for diversification, major life changes (such as divorce), funding for estate tax payments, starting a new business, or funding other major expenditures. What is the best way to provide liquidity to family shareholders on fair terms without sparking a run on the bank?
