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From Mom-And-Pop Shops To Professional Family Offices — What Is The Key To Sustained Business Growth?

Many businesses with humble beginnings have been able to weather change and grow into empires. Could professionalization hold the key to success?

Lee Russell, Texas 1938

Family businesses are built with an entrepreneurial vision that, at its core, has continuity, renewal, longevity and legacy in mind. To realize these objectives requires not only the achievement of sustainable business performance and profitability but also harmonious family relationships, next-generation engagement and successful transitions as succession comes into play

Petru Sandu’s “Framework of family business professionalization,” demonstrates that achieving this requires varying degrees of professionalization. This is necessary throughout the business’s overlapping ownership and family life cycles.

The Complexity Of Family Businesses

All businesses face challenges. What is unique about family-owned operations is the inherent complexity of family dynamics they encounter. These complexities intensify as the ownership life cycle unfolds. This life cycle, originally described by Kelin E. Gersick, Ivan Lansberg, Michele Desjardins, and Barbara Dunn in Stages and Transitions: Managing Change in the Family Business, forms part of Sandu’s professionalization framework.

1. The Founder Stage

Most family businesses begin at the controlling owner or founder stage with a single owner and their spouse enjoying full ownership and control. During this stage, the family is generally young and small, relationships can be contained to a small sphere, and usually, the business is the focal point of the family’s life.

The owner is typically the visionary and indispensable nexus of business activity, building value and directing activity. To survive, grow and ensure business efficiency and continuity, according to Sandu’s framework, management and leadership development both among family and non-family members is vital during this stage, as is succession planning if the business is to reach the next phase of the business life cycle.

Some formalization is required to do this effectively. Business objectives, as well as the family’s values and vision, should be clearly defined and communicated. A detailed succession plan that encompasses both contingency and purposeful succession naming should be put in place if the organization is to continue to thrive. Next-generation engagement efforts become a necessity to ensure effective succession transitions.

2. The Sibling Stage

During the second generation of the ownership life cycle, the sibling stage, brothers and sisters control the business together through ownership. The controlling family is often larger and more diverse and the company more sizable and complex. Family ties and relationships can become slightly disconnected as the siblings start their own families.

At this stage, the continued success of the business relies on the siblings’ ability to work as a cohesive team. According to Sandu’s framework, professionalizing the business by defining power structures and forming a family council or office, along with a family constitution, can help to ensure harmony as well as mitigate current and future conflict.

3. The Cousin Stage

By the time third-generation enters the business, the cousin stage, significant complexities arise. Both the company and the family are larger and more complex. With three generations related not only by blood but by marriage and often with various parties operating from different corners of the globe, new dynamics come into play.

Cousin families are presented with numerous challenges, from accepting branch differences to maintaining balances of power amongst these, as well as retaining aggressive reinvestment in the business. Additionally, they’re faced with managing the psychological impact wealth has on their families. Oftentimes the new dynamics require a complete redefinition of the family mission as they require one that encompasses the extended family.

This unique microenvironment impacts not only the business and its future, but also the family, driving and shaping the future of both. Thus, maintaining and enhancing family cohesion and dedication to the business is paramount to continuity.

At this stage, the importance of professionalization within the family business becomes increasingly evident. Research shows that the introduction of formal governance structures, councils and boards within the organization becomes essential and that most family businesses are more professional by this stage.

The success of these professionalization efforts relies on all parties, including next-generation family and external members being on the same page to avoid conflict.

The Growth Versus Control Trade-off

To ensure the successful transition from a young family business, to what Sandu terms “the passing of the baton,” higher levels of formality are required. Thus, the younger generation often drives professionalization.

Professionalization, can, however, be a double-edged sword if not managed accurately. W. Gibb Dyer, Jr refers to it as a “rational alternative to nepotism and familial conflicts that plague a family business.” It must, however, be noted that increasing professionalization might contribute to the weakening of the family’s identification with the business and often even diminished family control. This is because pursuing growth ultimately requires external party involvement and, in some cases, even funding. A fact that often explains older generations’ resistance to professionalization efforts.

Still, when managed well, attorney and mediator at Family Business Matters, Sonja Kissling believes that professionalization can afford the family office a substantial advantage over other firms. She explains that professionalization is a U-shaped process.

Initially professionalization is likely to weaken the family’s identification but professionalized family firms are then likely to have a strong family identification.

Sonja Kissling, Attorney & Family Business Mediator

In evaluating the professionalization of the family, the trade-off between growth and control is a significant consideration. It is also one that can be a source of great interpersonal conflict if all family members are not in agreement on the proposed strategy.

Professionalization With Purpose

Different levels of professionalization are necessary within the various stages of family business evolution. Being aware of the common challenges that a family may face at each stage of the multiple lifecycles allows family members to be proactive and address these issues before tensions arise, making room for greater prosperity.

Still, it is vital to be cognizant of what to professionalize within the family business and to what degree. According to family dynamics consultant, Brian Russell, “The business should exist to serve the family more than the other way around and in order for it to continue to do that over time, a progressive degree of professionalization is likely to be needed, potentially one day culminating in complete professionalization – if, at that point, divestiture of control is what best serves the family.”

He adds, “‘What best serves the family?’ can be a gut-wrenching question, particularly for siblings who still remember the founder’s idealized long-term vision of the business.” When it comes time to answer it, or when reassessing a preceding generation’s answer, Russell believes that “A good family-dynamics consultant can help the family members, individually and collectively, to take their respective loyalties, varying senses of duty, differently-aligned priorities, etc. into account and arrive at the right answer for them.” From here it can be determined exactly what needs to be professionalized and when.

Professionalizing with purpose throughout the various stages of the business’s ownership and the family life cycle is vital. This not only ensures the preservation of the organization’s entrepreneurial spirit but also its ability to capitalize on opportunities, reinvent itself and continue to grow and prosper for generations to come.


via Forbes – Entrepreneurs

October 15, 2019 at 08:17AM

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