!orily rness Moving into the second generation

By Jennifer Pendergast

fT seems that almost every article labout family business points out the statistic that only one in three family businesses survives into the second generation. For those families aspiring to take their business to the second generation and beyond, this fact can be very scary.

Unfortunately. there is no one secret to ensure that you reach the second generation. Every business and family has unique features that determine what will make it successful. However, there are many things you can do to increase your likelihood of success. They can be summarized under the four P's: philosophy, planning, people and policies.

Philosophy

Any business that hopes to make it beyond the first generation must decide on its philosophy of family business. Philosophy encompasses a number of important areas that a family needs to discuss together. First and foremost: Do we want to be a family business? If not, you can stop reading here. If you do want to continue as a family business, there are other areas of philosophy you need to consider, which include:

Why do we want to be in business together?

What role will the family play in the business?

What is the mission of our business?

Planning

Once you get beyond the philosophy questions, the next step is planning. Planning in a family business occurs in the arena of family as well as business. From a business perspective, having a long-term vision for the business is crucial. A common understanding of that vision across the first and second generations will allow a smoother transition.

One area of planning that receives a lot of attention is leadership succession planning. This is definitely an important area. But ownership succession planning can be just as important. While some members of the family may desire to create a multigenerational family legacy, others may not want to be part of the business. Developing a funded buy-sell agreement that allows family members to sell stock back to the business or other family members is important.

Retirement/financial planning is also important. If the first generation does not amass enough assets tO support retirement, the business may need to be sold. If the business has grown in value significantly, estate planning will be important as well.

To make the transition to the second generation, you need an estate plan that ensures that the stock of the business can be passed on to future generations without harming the cash flow of the business or the retirement of the first generation.

People

We cannot forget that the most important asset of the family and the business is people. To become a second-generation family business, you need second-generation family members capable of running the business, or at least overseeing the business. A leadership development protocol, which outlines the steps necessary to develop next-generation leaders, ensures that the next generation can be effective managers and owners.

If there is more than one secondgeneration member, defining how the second generation will work together is crucial. A sibling code of conduct articulates how second- generation members will treat each other and outlines a process for resolving conflicts, should they occur.

Whether or not family members choose to work in the business, they are often owners of the business. So, defining ownership rights and responsibilities is important as a family business moves to the second generation. Questions to be addressed are whether or not all second-generation family members will participate in decisionmaking relative to the business, benefit from the business financiallv. have a seat on the board, etc.

Policies

Policies are guidelines that outline how challenges that may face the business will be addressed. The key is to develop these policies before the challenges are faced. Similar to planning, policies fall into both the family and the business arenas.

The most crucial business policy to develop before moving into the second generation is the employment policy. This policy outlines the requirements necessary to obtain a position with the company and defines how family employees will be treated versus nonfamily employees.

Equally critical is a compensation policy. This policy defines how family members will be paid for employment within the business as well as service to the family. It can also address how family business-related expenses are reimbursed.

A conflict of interest policy determines what to do if a family member or their spouse has a potential conflict of interest with the business. For instance, what, if any, restrictions will placed on information shared with conflicted family members?

In the family arena, another set of policies is helpful. A family decisionmaking policy outlines who may participate in family decisions (e.g., spouses, college-age family members), what decisions will be made in the family arena, and how decisions will be made (e.g., consensus, majority).

If the family holds assets together outside the business, a policy on usage of shared family assets (e.g., vacation house, boat) can be very helpful. This policy addresses how decisions will be made concerning usage, sale or maintenance of the assets.

The Right Answer

You will notice that we have listed a number of areas that family businesses should address to successfully navigate the transition to the second generation. But, we have not said anything about what the content of your planning or policies should be. There is no "correct" employment policy or leadership development protocol for a family business. The process of developing these policies is what is most important. Family members should discuss each of these areas until agreements are reached and documented.

- Dr. Jennifer Pendergast is a senior associate with the Family Business ConsuLting Group, Marietta, Ga.; (800) 551-0633. She can be reached at penderg as t @ efami ly bus ine s s.c om.

Reprinted with permission from the author from the Family Business Advisor, a copyrighted publication of Family Enterprise Publishers.

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