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Professionalising the family business

Proactive family businesses create a family business constitution BEFORE they need one!

Starting a family business is relatively easy; sustaining it beyond a couple of generations is the hard part. . . It’s often said that the typical family business goes from rags to riches and back to rags in three generations.

Research around the world confirms that fewer than half of all family businesses survive the transition from each generation to the next. That means around 10% will make it to the fourth generation. It’s a sad commentary on the reality of family business.

The reasons for this failure are complex. However, it is recognised that family issues rather than business issues determine the outcome of generational change in the family businesses.

Business growth or successful generational transition ultimately requires an evolution from entrepreneurial to a professionally managed organisational system.

A successful transition should be planned & executed carefully & gradually in four stages:

  • Analysis and evaluation of existing business strategy
  • Formalisation of the decision making and information systems
  • Selection and training of key individuals
  • Constant monitoring of change to ensure a smooth transition

So how do you manage the change? . . . Adoption of a family constitution is the answer

Family businesses need rules that define expectations. Without them, the business can run into trouble – for the individuals as well as the business. As families grow and family business issues become more complicated, a written family constitution becomes one of the most important gifts that founders can give to successive generations. Often it is referred to as “the family deal”.

Family conflicts are as predictable as markets going up or down. It’s not uncommon for the business to be held hostage to family conflicts. Differences are simply part of the territory of being in business. A Family Constitution articulates the ground rules and more clearly defines family relationships and their interface with the business.

What is a family constitution?

A family constitution is sometimes called a family creed, family charter or family agreement. Regardless of what you call it the constitution does the following;

  • It documents the values and principles that will underpin the conduct of the family business.
  • It defines the strategic objectives of the business.
  • It sets out the way in which the family will make decisions affecting the ownership and management of the business.

Depending on the circumstances of the family and the business, the constitution can be either short and concise, or long and complicated.

Some people imagine that the creation of a family constitution will avoid family conflict over a family business. If only it were so. In truth, a family constitution won’t circumvent or avoid conflict. What it should do is provide a mechanism by which conflict can be successfully managed and resolved. The act of creating a constitution also forces the family to consider important issues about the future of the family business that might otherwise be put aside.

At the end of the day a family constitution contains the ground rules for interaction, sets the goals and defines the conditions for how things will be done. It contains a methodology for resolution of differences. It defines the conditions of the interface between the family and the business. The future harmony of your family and the continuity of your business may well depend on having the necessary discussions that lead to preparing a family constitution.  At Business By Design we urge businesses to make a family constitution before they need one!

Business By Design specialises in helping family owned businesses succeed, we can help them create, implement and adopt a family constitution as family harmony is paramount to business success and longevity. Please contact Business By Design on (02) 6658 0775 to make appointment.

 

Phone (02) 6658 0775