June 30, 2019
By: Mary Anne Cody
A common goal of owners of family-held businesses is for the business to survive for generations to come while still being owned or managed by the family. The odds do not favor the survival of family businesses to the third generation. Yet, there are businesses which do survive and survive very well for many generations. Examples of companies at the top of the ladder for successful family business succession are those companies which are members of the Henokiens Association. This association is comprised of companies which:
1) have been in existence for at least two hundred years;
2) have good financial health;
3) have the family still as the majority owner of the company; and
4) have at least one family member managing or sitting on the board.
To date there are forty-four members of the Association.
A study done of the Henokiens Association member companies observed that there was one common trait of these businesses. Each of the Association companies operated pursuant to specific governance procedures. Adopting and then complying with a written plan as to the ownership and management of family business is crucial to the succession of a business to the family’s future generations.
The initial question to address is first whether the family wants to purposely pass the business on to the next generation. This is not an easy question to answer and is dependent upon many factors including the viability of the company product for the future and whether there are family members in the next generation who have both the interest and the skills needed to run the business. Once this question is answered either yes or no the business owner should then put in place an immediate action plan.
If the answer to the question of succession is no, the family business is not likely to continue to the next generation then the business owner should make an exit plan. As with any long-term plan there should always be a contingency plan laid out if there is an unexpected death or disability (an immediate short-term plan and a long-term exit plan).
If the answer is yes, it is the wish of the family that the business goes on for future generations, the business owners should start to outline a family governance structure for the business. A governance plan individualized to a closely-held business is not an easy document to draft and it should be a fluid document that will change as the company grows and as the family grows. The strength of the governance plan is that it is an agreed to formal document that sets forth how the family and the business will be interacting. The document should address business succession and ownership rights including voting and management rights.
A family business governance plan can focus on the family itself and how it interacts with the business or focus on the business itself and how the family interacts with it. Each business owner will be able to determine which model best fits their business. The key to the use of any governance model will be the agreement by all to do more than just pay lip service to the plan but to commit to following the process and continuing to develop the process of the governance model as the business and the family change.
A good starting point for the development of a family business governance plan will be the education of the family in not only the business itself, but the product, the customers and the market. Family members should be aware of what ownership rights they have and will inherit in the future. The family should understand what it means to own a business outright, to own through a trust as trustee or beneficiary and to understand the difference between voting and nonvoting shares. Family members should understand all the corporate governing documents including the shareholder agreement and the rights are in the shareholder agreement such as rights of first refusal, drag along rights, tag along rights and other rights of stock ownership.
The examples provided by the members of the Henokiens Association show that for businesses to be successful for generations deliberate actions are required by all members of the family.