Family Enterprise – 3 key areas to keep in mind

We often hear the word family business and family enterprise, but what is the difference?

The family business at the beginning becomes the focus of what the family cares about, and it’s the most critical asset. On the other hand, a family enterprise includes the entire scope of activities that the family engages with, and what defines and shapes them. When a family business grows into an enterprise, and when a family enlarges its lens to incorporate all activities of their enterprise, it allows for better, more coordinated strategies and continuity.

Activities of a family enterprise are meaningful because they help to unite the family, so they need to be well managed and governed. Otherwise, problems can spread to other activities, making the enterprise less productive. To avoid these pitfalls, the leaders of the family business need to put in place some decision-making models, such as wealth planning and empowerment of financial and human legacy.

Wealth Planning

Many research results show that about 70% of family businesses are sold or fail before the second generation gets to take over. When it comes to the wealth-planning decision-making model, decisions were from the family elders (two generations before.) Today, the most powerful families use a democratic decision-making structure which has turned out to be a positive influence on family relationships.

Families can hire a professional facilitator to establish a voting system and set up a family office that will manage individuals and collective assets. Families can create committees (a popular decision-making structure) that meet regularly to make important decisions regarding their family enterprise, as well as to plan family wealth education. It is needed to make sure that the next generation is ready to take over the enterprise.

Empowerment of Financial and Human Legacy

Have you heard about the old proverb, saying “shirtsleeves to shirtsleeves in three generations?” In Scotland, they say “The father buys, the son builds, the grandchild sells, and his son begs,” while the Chinese say that “Wealth never survives three generations.”

To ensure your family enterprise is sustainable, you need invest and set up strategies to delegate control over your family’s structures and governance. An appreciation of family legacy has to be built, and it begins with an understanding that it’s more than financial assets.

The empowerment of financial and human legacy requires a commitment by all family members, effective leadership, and a practical approach to managing the change and risk that challenge a family. Leadership shouldn’t come from the head of the table but the heart of the family by establishing a shared history, shared vision, and a common direction.

If multi-generational families don’t plan, they won’t be able to sustain their success and will succumb to the three-generation rule. They need to foster an entrepreneurial spirit within the family, encourage them to think, experiment, risk failure, and take chances so they can realize their full potential.

Elaine King, CFP is an expert on family enterprise consulting, creating strategies for wealth planning, family governance, and financial education programs.

 

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