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Helping Family Businesses
Prosper Across Generations®

Set Policies Now to Solve Future Problems

By Craig Aronoff, Ph.D. and John Ward, Ph.D.

 

If there was just one thing you could tell a family business to help it achieve success down through the generations, what would it be? We believe that something a family business owner told us recently sums it up very well: I've learned that successful family businesses do a good job of anticipating future issues and talking about how to deal with them as a family, before they become issues.

 

In our experience, some of the thorniest policy issues that family businesses have to face include the divorce of a family member; alcoholism and drug abuse; unethical conduct; affairs of family members with employees; a break in trust or confidence; the mental disturbance of a family member; moral differences and poor work performance by family employees.

Discussing these and other potential issues in family meetings offers several benefits. First, agreeing on solutions to problems in advance helps prevent family members from taking issues personally; decisions can be more objective. Second, family communication and problem-solving skills are strengthened.

One way to deal with potential problems is to develop a set of family-business policies to guide future decisions and actions in a variety of areas. Here are some ideas that we've found effective in the experiences of families we've known and worked with.

Employment. Families that emphasize that family members should prepare themselves through education and experience to make a real contribution to the business seem to find greater harmony and success. Many families also develop policies with regard to in-laws working in the business and concerning part-time employment.

Retirement. Having a date for the older generation's retirement established well in advance makes succession planning more constructive and less emotional. Setting a date also helps planning for financial security and paves the way for fulfilling new interests for the senior generation.

Compensation. Open, explicit compensation arrangements are very helpful they tell family members what they can expect and what is expected of them. Compensation policies often address benefits, perks and time off, too.

Dividends. Develop a formula for dividend payout or family profit distributions that depend on the level of profits. Family members need to know the amount and variability of dividend income.

Company Loans. Many families discourage borrowing from the business. Even permitting the pledging of stock to get a bank loan can be troublesome for a family firm.

Stock Redemptions. Agreements on how family members can sell stock, if they wish, are important. Redemption eligibility can depend on company profitability. Everyone needs to understand how shares will be valued in the future.

Ownership Rights and Responsibilities. Many families formally state how family shareholders can learn about the business and whom they can contact in the company for information. They are clear about what issues will come to shareholders attention. Family members agree on what preparation and homework is expected of all.

Ethics. Consider possible conflicts of interest. What if the company receives gifts from suppliers? What activities are appropriate to be put on company expense accounts? To what extent does the family firm do business with other companies owned by family members?

 

 

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