RSM Resources

Baby boomers will have inherited $40 trillion by 2052 (Source: Foundation News and Commentary, 2006) and some estimates are even higher. Read that statement again. Then, imagine far more at stake than mere squabbles among relatives and branches of ever-expanding families.

The impact of this shift will be even greater for owners of a family business. Keeping the family healthy across generations in the face of substantial wealth and potentially less opportunity for direct involvement in the business, while supporting needs for organizational growth and adaptation in an increasingly complex and uncertain business climate, is a daunting prospect. In addition, family businesses will experience an unprecedented ownership and leadership shift in the next five to 10 years, creating significant implications for family leadership development and transition planning. Hold on for the ride of a lifetime.

Family business shareholders are challenged by the conflicting needs and sometimes irreconcilable priorities dictated by individual and family life transitions on the one hand, and the family business on the other. Managing the overlap between family and business is a critical factor for success and continuity. Families often wait until anxiety and ambiguity of a transition are overwhelming before making a change.
By understanding the implications of this overlap, families can be proactive in their decisions rather than reactive to needs fomented by change.

A broader focus on family business
Historically, the focus has been on the alignment between family/ownership and business systems. But there is another distinction that needs to be made: that of owners of a business and members of a family.  

“According to the Williams group’s research, family dysfunction causes financial and estate planning failure six times more often than any other factor,” (cited in Groome, E.R., Challenges involved when emotional capital finds a voice). Furthermore, lack of trust and poor communication were identified as the primary factors contributing to failure in two-thirds of failed situations. The generally accepted belief is that the family is the main threat to long-term continuity of its business and wealth, not factors associated with the business system.

Relational issues are central to the “success” and “continuity” of family businesses. Consider some of the issues that impact the cohesion of many families: unresolved conflicts, sibling rivalry, poor communication, generational issues, difficult interpersonal relationships, family demands on the business and lack of trust.

Emotional capital and the business family
Family business consultants typically focus on helping family members define what they want for the family and the business. They then guide the process of aligning the family’s vision and values with its actions. Most family business consultants are involved in helping families create the structures that manage family governance factors in the context of the family business. Structural capital includes the structures by which a family governs itself in its business and investment dealings, wealth management, decision making, philanthropic efforts, and use of advisors. Development of a written family constitution is an example of the work a family might undertake to develop stronger structural capital.

However, the long-term success of a family business will depend on its investment in the concurrent growth of both the business and the family — in both its structural and its emotional capital. The degree of trust among family members is a critical factor for developing and maintaining business family emotional capital. In a broad sense, emotional capital includes the collective relational and emotional assets of members of an extended business family.

If a business grows and changes, and the family doesn’t, both the competitive advantage of the business and family “health” are at risk. Businesses usually change and grow based on an intentional plan. Too often, expectations and assumptions are that the family will change and grow on its own without the guidance of intention, a plan or choice. But that’s not necessarily the case. Families resist change, focusing on safety rather than growth.

Differentiating our family business and business family
At the cusp of a major transition in family business continuity: A change in not only the leadership of family business entities but also the transfer of considerable wealth.

When the family and business grow, owners of a family business often fail to take proactive steps related to investing in the family. Evidence suggests that planning for these changes is sorely lacking. Developing structures and guiding a process of individual and family development will not only increase the emotional capital within the family, but also will strengthen its ties to the business — ultimately its success and continuity.

If your family isn’t already, now is the time to focus on balancing needs related to ownership of a family business and membership in a business family — you can’t afford not to.

John Hughes is a director with RSM McGladrey Strategy and Human Capital Services. For more information, contact him at john.hughes@rsmi.com.