Doctors are advised not to operate on their family members, and there is good reason for this: Judgment can get skewed and the result can be less than ideal.

Likewise, a director should not have an overly emotional tie to the company he or she is in essence “operating” on—whether that tie be a family connection or financial dependence.

If there is one thing that great boards have in common, it is that they include truly independent directors.

Independent directors bring the following qualities to a board:

• Balanced focus on present state and future needs

• True objectivity

• Transparency for all shareholders/stakeholders

• Proper assessment of risks

• Elevation of the company to the next level.

Be sure to take one on board. Should you need more advice, please do not hesitate to contact us here at Family Business Ireland.

Source

https://www.familybusinessmagazine.com/what-independent-directors-bring-board

Although privately owned family businesses enjoy significant competitive advantages to help attract, engage and retain executive talent, family firms also face several common compensation challenges.

• Informal pay governance process: Compensation governance in private family firms tends to be a bit more informal and less structured than in public companies. The compensation committee usually consists of family shareholders and insiders, rather than independent directors. When insiders serve on a compensation committee, executive pay discussions can be more personal and potentially contentious.

• Opaque compensation plans: Many family companies offer unique compensation programs, but these programs are sometimes opaque and not fully understood by all stakeholders. Obscure features of the compensation plan may persist, and executives may lack a complete understanding and appreciation of the value of the total package.

• Below-market long-term incentives: There are numerous reasons why family companies offer below-market long-term incentives. These reasons include the family’s unwillingness to share equity and thus dilute both ownership and earnings. Thus, it is often unrealistic for a private family company to match the long-term incentive compensation levels offered by public companies, and the total compensation strategy must consider this shortfall.

• Absence of a total compensation strategy: Family companies often lack a cohesive compensation strategy covering all elements of executive pay: base salary, annual incentive, long-term incentives and benefits/perquisites. The company leaders may not understand how all of the elements of pay fit together as well as the trade-offs between various elements. The family company may find itself leaning too much on the culture and goodwill of executives, believing that loyal, long-tenured executives are less concerned about compensation.

• Lack of external market knowledge: Private family companies often lack an understanding of current market practices and norms. Small companies place less emphasis on the external labor market. They tend to promote executive talent from within the company, until that is no longer tenable. A lack of knowledge about executive compensation trends can hinder the ability to compete for talent.

Source:

https://www.familybusinessmagazine.com/why-family-businesses-may-be-losing-war-talent

Staying on top of technology is a challenge for every business today. As an organisation we've always embraced progress so we channel technology effectively. Jane likes to think that they've used it to take the work out of finding a job.

While bringing many benefits, technology also brings with it many threats. With companies gathering more and more information on their customers, there is the increased risk of damage to those individuals should a company suffer a security breach. This information, if improperly exposed, could cause a lot of embarrassment to the people affected

Helping you and your family grow and protect your wealth

As a successful family business owner, you need a strategy for protecting your personal wealth and structuring it for growth. This is particularly the case within a global ecosystem characterised by increasing complexity and often duplicative tax regimes.

If you travel between, own assets in, or run businesses from a variety of jurisdictions, you require multijurisdictional solutions to your tax, regulatory and commercial issues. You need advisors who not only know all the rules—but also know how they will be applied to your unique situation.

Practical, business-focussed wealth solutions

While our global network of family business professionals includes tax and pension specialists, lawyers, corporate finance and investment consultants, they are all—first and foremost—business advisors to our private clients. Our network covers many major and emerging countries to provide you with a fast and efficient answer to your issues.

That means we provide innovative and robust advice in a practical and commercial way you’ll be able to understand. You don’t need to have a detailed knowledge of international tax law, finance or complex cross-border regulatory risk because we’ll explain these to you.

Here are some of the services we provide our high-net-worth family business clients:

• Effective tax planning. We can help you structure the way you hold your business interests and investments to ensure you take full advantage of any reliefs, double-tax treaties and EU treaties that are available.
• Estate and gift planning. We advise families on the sometimes emotional issue of passing on the family wealth in the most tax-advantageous way-carefully factoring in the unique gift and wealth tax and legal regime in each jurisdiction you may be involved with.
• Family offices. We provide a full array of business services to your family offices, wherever they are located-including valuation, corporate finance, risk assurance, investment structuring and management, and of course, tax and legal services.
• Risk management. We ensure that our clients manage their investment risks with counterparties, providing assurance over the stewardship of their assets as well as managing the tax and regulatory risks of operating in different jurisdictions. We help you sleep at night.
  

"It is important to teach each new generation, early on, the difference between ownership and stewardship. Ownership is a right of possession. Stewardship is a fiduciary role. It is holding the institution in 'trust for' the next generation. We feel, as a family, that this institution has been passed on to us for our care and not for us to dissipate or do what we will with it for our personal gain."

Source: http://www.pwc.com/gx/en/services/family-business/private-wealth.html

An oft-cited statistic is that only 30% of family businesses make it through the second generation, 10-15% through the third, and 3-5% through the fourth. These are disheartening numbers.

But let's put them in perspective. How many companies of any kind are still around after the equivalent of three or four generations? A study of 25,000 publicly traded companies from 1950 to 2009 found that, on average, they lasted around 15 years, or not even through one generation. In this context, family businesses look pretty enduring.

And the numbers are only going to get more flattering. In the context of competition in the 21st century, family businesses have innate strengths over others forms of ownership, especially public companies. For most of the last century, companies confronted oceans of opportunities, which meant that winning strategies revolved primarily around size. Public companies had a clear advantage in the scale economy; they are especially suited to raising capital. But firms today are no longer looking out at endless opportunities. Instead, they have to struggle for their very survival in an intensely competitive world of slower growth, lower returns, and more frequent economic crises. In this brave new world, public companies are losing their dominance: their share of America's GDP, workforce, and assets has fallen by 50% over the last quarter of the 20th century.

For family-owned businesses, the story is rather different. The qualities often associated with family businesses that were a handicap in the previous century are turning out to be powerful sources of advantage, giving them the potential to be more adaptive to the increasingly intense competition that all businesses are facing. Specifically, family businesses have the opportunity to achieve sustainable advantages in five key areas:

Talent: From Mass Employment to a Higher Calling

For much of the 20th century, success depended on a company's ability to hire, train, and retain ever-larger numbers of employees. This was the era of the company man, where employees exchanged long-term loyalty for a livable wage and a pension plan. In today's knowledge economy, success depends instead on finding, empowering, and retaining the most talented people. Businesses need to do more than offer competitive wages and benefits; they have to provide a "higher calling" that makes clear the intrinsic value of working for their companies. As a recent Bain & Company study put it: "Employees want to work hard because they believe in their company's mission and values, not just because they hope for a large salary or a fast promotion."

Much has been written about values-based cultures, but families are the primary carrier of values, and business families can weave their values into the very fiber of the organizational culture. Our experience has shown that because employees work directly with the owners, there is often a pronounced loyalty effect, which augments the important sense of mission.

Investment: From Other People's Money to Captive Capital

In the scale economy, capital was the lifeblood of success. And given the pace of growth, capital was always in demand. In today's economy, however, the priority has shifted from the quantity to the quality of investment. Outside funds bring with them a pressure to achieve short-term results that trade-off with value creation. A study of leading public company CFOs published in the Journal of Accounting and Economics (2005), found that 78% of these CFOs would be willing to make decisions that destroy value in order to achieve their quarterly earnings targets.

Family businesses don't have these problems because they can obtain "captive capital" that will not easily migrate to other firms. Their owners often think in generational terms – in decades rather than quarters or years. Without external markets to please, they can take a long-term perspective and make decisions on the basis of sustainable economic value. As a result, family equity can come at a very low cost of capital, where businesses can meet the annual needs of their shareholders without having to worry about paying back the principal. What's more, since the money at stake is their own, family businesses tend to be cautious in their spending, and the discipline that comes from frugality is a tremendous advantage when topline growth is harder to achieve.

Reputation: From Profit Motive to Sustainable Footprint

In the 20th century, there were relatively few channels (literally, in the case of TV) by which companies could build their reputations, which enabled the largest companies to control them. It was not unreasonable for Milton Friedman in 1970 to say that the "one and only one social responsibility" of businesses is to raise their profits. In the 21st century economy, the standard has risen considerably. As one client told me, "It used to be that unhappy customers would write a letter. Now, they snap a picture of a defective product, upload it to Facebook, and all of a sudden it's gone viral. We have to stay out in front of our image."

Family businesses have a big head start in building a "sustainable footprint." There is often a personal connection between the family and the communities in which it operates; reputations matter to families. Investments in the community are likely to have social rationale in addition to an economic one. One client built a hotel complex in an underdeveloped area. They could have flown in all the supplies that they needed, but instead they decided to invest in local farmers to supply the food for the resort. Over a three to five-year period it cost them money, but over a 20-year period this investment will pay off handsomely. With a longer time horizon, tradeoffs between strengthening the community and making profits can simply disappear.

Organization: From Managing Complexity to Rapid Response

The leading companies of the 2oth century were behemoths. Henry Ford's company covered the entire value chain from end-to-end, including owning the grazing land for the sheep whose wool was used in seat covers. But instead of managing highly complex structures, the greatest organizational challenge of the 21st century is dealing with change. Companies will need to build the capacity for flexibility, adaptability, and quick/decisive action in response to shifting market conditions. The new mantra is to shorten the distance between leaders and the frontlines.

Family businesses are well-suited to dealing with this imperative of "rapid response." They tend to have nimbler and flatter structures, where information flows quickly and easily in to the leaders and decisions come out. There is also often more of a direct connection from the ultimate decision-makers to their employees. While less adept at delegating, they can more quickly and decisively commit the organization to action. The privacy that family ownership allows also helps executives stay focused on strategy rather than meeting market expectations. In Fortune's last survey of leading CEOs, 84% of CEOs said it would be easier to manage their company if it were private.

Governance: From Separation of Powers to Engaged Owners

Decision-making in large public companies is primarily vested in management, which generally is not composed of majority owners. As a result, ownership of the business is split from day-to-day control, creating what economists call a "principal-agent" problem. The traditional priority for good corporate governance has been to align management incentives with the interests of shareholders, often through equity-linked compensation plans. But by the end of the 20th century it had became clear that this endeavor has failed. Efforts to make managers act like owners through stock options have backfired, leading to skyrocketing pay, and opening the door to numbers-rigging scandals such as Enron.

The principal agent problem is far less severe in family businesses because they foster "engaged ownership." The simple fact that there are fewer owners makes the oversight of decisions far easier; even family businesses with hundreds of owners are better positioned to provide effective oversight than public companies, whose owners can number in the hundreds of thousands. And when family members with large ownership stakes are also involved in managing the business, incentives are easily aligned.

The public corporation has been the dominant model for business enterprise for most of the last century, and this reflected the fact it was the best solution to a particular set of economic circumstances. But those circumstances are changing and family businesses that manage the five sources of advantage described above are well placed to make the 21st century a family business century.

Source: https://hbr.org/2016/03/why-the-21st-century-will-belong-to-family-businesses

A story of how family member came together from diminished job prospects and used their skills in the best way to make their franchise a success today.

When Jon S. Crowe invited his son, Jon P. Crowe, to take a road trip from their home in Omaha, Neb., to Whitewater, Wis., neither of them had ever, for a second, thought about working together. The elder Crowe was heading east to learn more about the Toppers Pizza franchise business and just wanted his then 25-year-old son, who was working in retail at the time, along for company. “Working with my dad did not cross my mind,” Jon P. says. “I was there looking out for him and our family. I just wanted to put my two cents in.” 

Jon S. had long known just how suited to running a business his son was. Jon P. was levelheaded. He didn’t shy away from having hard conversations when people didn’t meet his expectations. He was a hard worker. Yet he’d never really considered working with him before. But “during those meetings [at Toppers Pizza], I thought that it would be a hell of a lot of fun to work together,” Jon S. says.

On the ride home, he asked his son to join his franchise team. It turned out to be a great idea. That was five years ago. Today the father and son own three pizzerias in the Omaha area, with a fourth on the way. While Jon S. handles strategy and long-term planning, his son is in charge of the day-to-day operations of the stores.

The Crowes are not alone. While it seems like a recipe for disaster (kids listening to their parents? yeah, right), franchise brokers and franchise brands report that increasing numbers of parents and their children are going into business together and enjoying fantastic success. 

Talkin ’bout our generations

Marty Welch, founder of Martin Franchise Consultants, says the landscape for multigenerational franchisees has changed quite a bit in the past decade. Twenty-five years ago, he says, most multigenerational deals involved a parent “buying a job” for an adult child who was having trouble finding their way in life or holding down a corporate position. More often than not, it was a bad investment.

But since the Great Recession, that has changed dramatically. First, Welch says, there are more financial hurdles to overcome for prospective franchisees, and franchisors are much more discerning. “Franchisors want to meet the person who is going to run their franchise unit, not just the person investing the money,” he says. “If they’re not passionate or engaged, they will turn them down.

”In the past, people would have said, ‘No way; i’m not working for my dad.’ but now young adults say, ‘Dad is pretty cool.’”
-- Marty Welch, Martin Franchise Consultants

Now, he says, parent-child franchisees have a different mindset. Going into business together is a way for both generations to exit the rat race. Many older workers have bounced back from the recession but live in fear of losing their jobs as they age and are disappointed in a lack of wage increases. Younger adults also suffered during the recession, which has them looking for alternatives that allow for more flexibility and job security than the corporate world provides. Franchising offers an alternative for both.

And the generational conflicts that defined the baby boomers (don’t trust anyone over 30!) have faded. “In the recent past, people would have said, ‘No way; I’m not working for my dad,’” Welch says. “But now young adults say, ‘Dad is pretty cool. You know, going into business with my parents might be a good opportunity for me.’” 

Sean Fitzgerald, who cofounded the franchise brand Pickups Plus with his father in the 1990s, has dealt with dozens of multigenerational franchisee combos while serving as senior franchise development director at brands like Wireless Zone, Quiznos and BrightStar Care. He says that for many families, going into business together is an obvious path. “No one really wants to go into business alone, and ideally you would have a partner that you can trust, someone like family,” he says. “Trust and honesty are the top reasons why a partnership works or not.”

All in

Not only did Colter Lange’s parents have that type of trust in him, his sister did, too. The Lange family worked in the oil business near Midland, Tex., and wanted to hedge their bets against the area’s boom-and-bust economy. Colter, in particular, was interested in stepping away from oil. He looked at several options, but his mother, Lisa, convinced him to look at franchising. One day when the two were visiting Colter’s grandfather in Denver, they stumbled on the Smiling Moose Deli, an upbeat restaurant serving sandwiches, wraps and soups. 

They knew the brand would fly in their corner of Texas, and they signed on. Colter and his parents each took a 45 percent stake; his sister and her husband, who is a lawyer, agreed to provide legal services for a 10 percent stake. While everyone else kept their day jobs, Colter committed to the brand full-time as caretaker of the family’s investment.

None of the Langes had any restaurant experience. The learning curve in those first months was steep, and Colter was grateful that everyone stepped in to learn the ropes and to make the process work together. “Mom still helps me quite a bit,” the 33-year-old says. “I will say we definitely couldn’t have done it without everyone helping out.”

In the beginning, Colter worked in the store as a manager. But after six months, the family made the decision to buy a second store in San Angelo, Tex., and another in Odessa soon after that. Colter found good general managers and took a more supervisory role. Now the family is moving into a second franchise brand, The Beef Jerky Outlet, which Colter will also spearhead. “I don’t think the learning process will be any different than it was with the deli,” Colter says. “The family will be there to help out where needed until we figure out that concept. Everyone will get their feet wet.” 

Fortunately for the Langes, mixing family and finances hasn’t caused problems, and they are committed to reinvesting their profits and expanding their holdings. “It hasn’t changed our family dynamic,” Colter says. “Luckily, with my brother-in-law being a lawyer, he laid out word for word what everyone does.”

“The family will help out where needed until we figure out the concept. everyone will get their feet wet.”
-- Colter Lange, Franchisee

 

Welch says that’s the right move. “Working with family can cause strife and anxiety,” he says. “There have to be rules of engagement when it comes to family.”

Fitzgerald says when he would meet with potential parent-child franchisees, he warned them to figure out their roles and expectations before forming a partnership. “At the end of the day, if things don’t work out, it’s not just a business partnership that ends, it affects a family,” he says. “It can be disastrous for everyone. They need to set expectations, make sure everyone is doing this for the right reasons and create the right structures for success.”

The Crowes haven’t endured any major conflicts so far as they’ve been building their pizza empire. Their disciplined separation of their business and personal relationships is a big help. In the beginning, Jon P., who lived in a different town, was spending five nights a week at his dad’s house. “We would work together 12 hours a day, then come home and talk shop three to five hours after that,” he says. Now the father and son try not to talk business with each other after 8 p.m and are trying to move any off-hours chats to a weekly standing lunch appointment. 

Role players

For Lucas Bergeson, the key to maintaining a positive family dynamic was figuring out the right role for himself, his brother and his father while developing their Mooyah Burgers, Fries & Shakes franchises in Fitchburg and Madison, Wis. Lucas, 25, learned that his strength is in training employees and operations. His brother, Josh, 28, enjoys working on the financial side of things. Their father, Randy, handles more strategic matters, though everyone fills in when needed. “We all have different interests, and we couldn’t have planned it any better,” Lucas says.

Randy, who also runs several Subway franchises, says he was surprised when Lucas showed an interest in working with him. Soon after high school, his son asked if he could join the family business. Randy told him to go to college, and if he was still interested after he graduated, he would consider it. Lucas only got more excited about the prospect over time, and the father and son began looking at franchise concepts while Lucas was still in school. That’s when they found Mooyah. Josh also expressed an interest in starting a franchise with the family. “At that point, I thought, Oh, shoot, this is getting serious,” Randy says. 

The Bergesons signed on with Mooyah, then spent the two years between 2012 and 2014 searching for the right locations to open their first restaurants while Lucas finished college. Over the course of 2014 and 2015, Josh became general manager at the suburban Fitchburg location, while Lucas took over a location in downtown Madison. 

Randy is happy to be working with his sons, but says he would not have taken the chance if he did not trust them and believe in their work ethic. “What they are doing is good old-fashioned sweat equity,” he says. “We’re essentially equal partners.”

Fred Schaard also found that divvying up responsibilities has helped him create a strong, coherent team among his family members. Schaard, a partner in a financial services firm in Lansing, Mich., was approached by a franchise developer for Two Men and a Truck about expanding the brand to Portland, Ore. Schaard had no interest in relocating, but he realized he had a ready-made franchising team to call on. His son Joe and stepson Bernardo both had business degrees, with Joe focusing on operations and Bernardo on sales. Stepson Adrian worked in accounting.

And Joe’s girlfriend, Christine, had experience in marketing. They all agreed to move to the West Coast to run the franchise unit. “So with a team of four hardworking people I trusted, I felt confident I could go forward,” Schaard says. “I couldn’t do it without someone I trusted, and they couldn’t do it without capital, so it made for a good team.”

The team is developing three units in the Portland area, and will build equity over time. Like in all businesses, the early days were difficult. Demand for their moving service was high when they launched at the beginning of 2016, but the twentysomethings found the labor market in Portland to be a challenge; legal marijuana use in the area made it difficult to find drug-free employees and it was hard to attract people willing to do the hard physical labor required every day. But Bernardo, Joe and their team are finding their footing with guidance from Fred.

For Bernardo, the opportunity was the realization of a lifelong dream. “I always wanted to open a business. As soon as Fred presented the opportunity, I didn’t hesitate,” he says. “My family moved from Mexico to Michigan to pursue their dreams. Why wouldn’t I do the same in Oregon? I just didn’t think it would come along so soon.”

As they build their business, Joe and Bernardo are proving that family money doesn’t mean they can slack off. If anything, Fred sees them working harder than ever. Same goes for Jon S. Crowe when he looks at his son, Jon P. “He’s working his butt off,” Crowe says. “That’s one thing I admire about Jon. He’s never backed away from the hours. I’m just grateful I could provide him the opportunity to show everyone what he could do.”

In the end, that’s what multi­generational franchising takes to succeed -- two parties with an equal commitment to success, even if they don’t start out with equal experience or financial resources.

Source: https://www.entrepreneur.com/article/283738

For the past decade or so, the prevailing wisdom among family business consultants is that second generation (and beyond) family members should work a minimum of three years outside of the family business before joining. Many are now recommending a five-year minimum.

Of course, similar to all best practices, this guideline must be applied thoughtfully to every situation based on the specifics of that organization, and, in this case, the individual.

Generally speaking however, the following list provides support for this practice of having family members work elsewhere before joining the family business as their primary job. It:

1.Increases credibility of family member among non-family employees. Others can see that this individual has actual experience rather than just a family connection.

2.Provides outside knowledge and processes that can be brought into the family business. Innovation doesn’t come by avoiding new ideas…it is the byproduct of it.

3.Minimizes individual’s insecurity of feeling that they have no skills or value outside of the family business. My book, Trapped in the Family Business, was written, in large part, for those who doubted their ability to get a job elsewhere because never had to write a resume, go on a job interview or have an annual performance review.

4.Allows the child to explore other potential career paths that might be a better fit based on personality, interests, or goals.

5.Potentially increases the individual’s appreciation of the value and opportunities provided to them by being a member of their family’s business. How can they appreciate what they have if they never experience living without it?

Included in the recommendation to work outside of the family business first is often the requirement for individual family members to demonstrate success. This can be through a promotion, increased responsibility, or some other tangible measure of growth. Without this, family members may not truly explore and engage in this outside job and simply be waiting for their time to run out.

Similarly, if a family member fails to demonstrate success in another work environment, this could indicate that they have problems with authority, collaboration, motivation or some other area that could have extremely negative consequences once they are in the family business.

To be fair and balanced, it is critical to note that there are many advantages to joining the family business soon after graduation. It:

1.Expedites development of individual’s specific knowledge and processes of the family owned/operated business. They won’t be spending their time learning potentially irrelevant knowledge at another business.

2.Accelerates the building of working relationships with key customers as well as employees. Relationships take time to build, and this provides the opportunity to start (or continue) building them rather than waiting for years.

3.Provides additional time to get to know the business “from the mailroom to the boardroom” by rotating through various departments before taking on management/leadership responsibility. If the next generation starts young, there may be less hesitance to start them at the bottom than bringing them to do that after they have already “paid their dues” elsewhere.

4.Provides career/management development opportunities (whether by position or project) that would not likely exist in other companies until mid-career or later because of family-member status. They might be trusted more to experiment or apply academic knowledge because they are family rather than having to climb the ladder at another company.

5.Expedites succession planning by developing individuals for specific leadership roles in the family business or, alternatively, determining that they do not possess the necessary personality traits, values, or skills for such positions.

Clearly, a case can be made for either decision. However, being open, honest, and realistic while having ongoing discussions on this topic is always going to be the right decision in a family business.

Source: http://www.sbnonline.com/article/joining-family-business-children-work-elsewhere-first/

One of the first questions we ask clients is, “How do you own your family business?” Often the response is legalistic: “We are a limited liability company”  or “Our shares are held in trust.” This information is essential, of course, but it leaves unanswered the more fundamental questions: “In your family business system, who gets to be an owner? And what, precisely, does ownership mean to you?”

The lack of awareness that family business ownership requires a set of choices is perhaps the greatest – and most harmful – misconception in the field of family business. Indeed, a failure to understand your ownership options can ultimately cripple your business, causing it to lose its competitive advantage, even resulting in buy-outs or sales that nobody really wants.

The best way to head off these crises is to understand that there are different ways of owning family businesses. Although there are hybrids, most family businesses adopt one of five models of ownership. One of the most important decisions you’ll ever make is to choose which model to adopt.

We worked with the fourth generation of a construction giant, for example, where the family was deeply divided because owners held different ownership assumptions. Those actively engaged in the business resented what they called the free-loaders – family members entitled to equal distributions of profits, even though they were uninterested or unqualified to work in the business. The free-loaders had their own bone of contention. They saw owners working in the business as robber barons who inveigled cushy salaries and benefits.

Superficially, warring family members were arguing about compensation and dividends. In reality, disagreement ran deep about what it meant to be owners in their family business system. Some family members were adamant that owners should work in the business, while others passionately disagreed: “This is our inheritance! Our great-grandfather wanted us to be equal owners.”

The breakthrough came only after the warring camps became aware of the five basic ownership models: owner/operator, partnership, distributed, nested, and public. Understanding each model’s implications and trade-offs finally allowed the owners to start having calm discussions about what ownership meant for them, making compromise possible.

It’s critical to periodically revisit how you own your family business – particularly during times of transition. Holding on to the model that worked beautifully in the previous generation can threaten, or even kill, the business in the next generation. It can also put an impossible strain on family relationships.

Perhaps the simplest model replicates the role of the founder – it keeps ownership control in one person (or couple). This model, which we call owner-operator, can be successful for many generations. Think of the British monarchy. Or Caterpillar Inc., whose corporate philosophy encourages distributors worldwide to have one person who works in the business with ownership control. For the owner/operator model to work, families need to find a means for deciding who gets to be the owner-successor that is perceived to be fair.

For other owners, the partnershipmodel works well. Partnerships are unique in that only leaders in the business can be owners and benefit financially from it. We worked with a massive shipping company run by five brothers as a partnership. The sons expanded the business they inherited from their father into a billion-dollar company. Their partnership worked because the brothers contributed more or less equally to the business’s success. They drew the same salaries and profit distributions.

Trouble didn’t break out until the third generation. Four of the brothers invited their sons to enter the business, creating a dilemma for the brother with just one daughter. She wasn’t even considered as a potential business partner, an exclusion that cost her millions. Her father gave his brothers an ultimatum: either they admit his daughter, or he’d blackball their other sons from entering the partnership, too.

Questions of entry to the partnership became paramount. The company continued to operate day-to-day, but since the partnership required consensus, all major decisions were postponed. Tragically, when the brothers couldn’t reach unanimity, they sold the company that had given them, and other family members, a deep sense of identify and purpose.

Was this outcome inevitable? Not at all. Even in situations of tremendous conflict, you can save your family business if you consider different ownership models. The owners here might have moved to a distributedmodel, for example, where ownership is passed down to most or all descendants, whether or not they work in the company. Shifting to this model might have allowed the brothers to reconcile their differences. All members of the third generation could have become owners, while changes in the compensation policy would have rewarded those contributing to the success of the business.

The distributed model is the default position in most family-owned businesses. Parents usually want all their children to inherit equally and, besides, most assets are wrapped up in the company. But there are challenges with this model, too. Family members working in the business often disagree with those outside the business, differing, for example, on compensation and distribution policies.

Still another option for family business owners is the nested model: Various family branches agree to own some assets jointly and others separately.  This model – nested in the sense that smaller family ownership groups sit inside larger ones – is particularly attractive when conflict or differences in preferences interfere with decision-making on shared assets. For the nested model to work, the family runs the core business as a profit-making operation and distributes relatively large dividends to the branches, which then use the money to create their own business portfolios.

The nested model can effectively reduce tension among branches while keeping the family together as a whole. There’s a risk, however, of under-funding the core business to finance the outside investments. A final option is the publicmodel, where at least a portion of the shares are publicly traded, or where a family business behaves like a public company even though it remains privately held. Whether shares are publicly traded, or not, the business is run by professional managers, and the owners play a minimal role, usually limited to electing board members.

Otherwise, they either support the direction of management or sell their shares. This model works well when the business requires a significant infusion of outside capital, or when owners are too numerous, dispersed, or disinterested to be engaged actively in decision-making. The key question then becomes how the family owners can maintain control when they play such a limited role in making decisions about the business.

There’s no natural progression from the owner-operator model to the public model. Owners can, and do, move back and forth between models. We’ve seen ownership groups shift even very large companies from the public model to the distributed model.

Of course, moving to a different ownership model involves big changes in governance, legal structures, and family relationships. That’s not easy. But adopting a new ownership model can help owners unlock a family business that’s become very stuck. It may also be the one thing that can keep your family together.

Some of the identifying details in this article have been changed to protect confidentiality

Source: https://hbr.org/2016/09/the-5-models-of-family-business-ownership