Monthly Archives: August 2014

Challenges and troubles ahead for the founding generation

WHEN a business owner dies or becomes permanently disabled, the business itself may die or be permanently disabled on the same day – not because something wrong was done – but because nothing was done!

According to a Forbes article, when Samsung Electronics chairman Lee Kun-Hee suffered a heart attack in May, investors began to consider the impact that a sudden, accelerated leadership succession might have on the company. Lee is expected to eventually hand the reins to his son, Lee Jae-yong, 45, who has worked at the company in various capacities for 23 years. Does the younger Lee have what it takes to steer Samsung forward in today’s competitive business environment?

The founders of most family businesses are now looking at their own children and wrestling with this same question. For them, the next five years is critical. This is the peak succession period as 30 percent of family-owned firms will experience a change in leadership due to retirement or semi-retirement.

The Forbes article further added, “after decades of hard work and sacrifice to make their enterprises successful, they want to ensure they are “built to last” – a legacy that will help support future generations.”

In my work as a family business coach in the region, one of the most important factors that affect family business transactions is the lack of a clear, well-defined business succession plan. The lack of such a plan may create a conflict between the potentially inconsistent goals of family unity and the continued financial success of the business.

Another very important factor is the failure to address the issue of who will run the business – the issue of “control.” In an intergenerational (2nd Generation) or multigenerational (3rd Generation) family of several siblings and cousins, this poses quite a challenge of choosing a successor and can cause sleepless nights for the patriarch and senior generation members.

Additionally one other neglected factor is the failure to ensure that the surviving spouse has a market for the business ownership that they have inherited and sufficient income that will reasonably last for their projected lifetime.

Without a well-defined business succession plan, the family business will collapse!

The reason why we are talking about these issues is that proper business continuation planning canensure the future succession of the business, andavoid conflicts between the remaining owners and the family of the deceased owner.

What events do we need to plan for? There are many events that can disrupt or put the business at risk, but the most common ones include:

1) The death of an owner

2) The disability of an owner

3) The bankruptcy or divorce of an owner

4) The retirement of an owner, and

5) The withdrawal for whatever reason of an owner prior to retirement

When we use the term “business succession plan” it actually has several components.

First of all there is the human component. The second major component is the agreement itself.

The “human issues” in a succession plan

This component is often the most difficult and challenging part of the succession planning process and the reason why many owners never get their planning finished.

For starters, you need to look at your business and ask yourself:

1) Who are my key players?

2) Have I promised ownership to anyone other than my existing partners?

3) Are there family members already working in the business and how do I judge their commitment to the business for the long haul?

4) Is there an “heir apparent” for control of the business? Did I promise that person they would have control?

5) Are there family members or in-laws who are not currently involved in the business but will want to be a part of it in the future? This could be family members who are children or students who plan to enter the business in the future.

There are many other important questions that affect the long-term survivability of the business. Due to space constraints, I will tackle those questions in another column.

For now, the message to the founding and senior generation leaders is loud and clear.

Do not neglect or set aside the issue of business succession as the “Do Nothing” option has dire and irreversible consequences.It is not only the least logical, the most costly, the most destructive, and yet sadly and by far and away the most popular!

(Professor Soriano is an Asean Family Business Advisor and Chair of the Marketing Cluster of the Ateneo Graduate School of Business. He will be facilitating one of his best selling 1 day workshop on September 19, 2014 Friday, entitled The Challenges of Managing a Family Business at the Crowne Plaza, Ortigas Center. For further inquiries please visit wongadvisory.com or contact Allen at 09228603186 for details.)

12 steps to make a family business last generations

“Competitive Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.”

Michael Porter

WHEN a trade official was asked what makes a family business last from generation to generation, she said that there was so much information available about how to start a business but she wasn’t sure what makes a family business last and what will not make it last.

Perhaps instead of asking what, the entrepreneur should find out how to make his or her business last from generation to generation.
The term “family business” is slowly making it to mainstream business literature. However, there is no accurate image of family business except the “ala-Chinese style,” thanks to business tycoons like Henry Sy, Gokongwei, etc.

The Filipinos may have graduated from the “sari-sari” store to small and medium business enterprises. But for one thing – there is less hype on how to make a business last from generation to generation. So it is no wonder that the idea of how to make a family business last from generation to generation contributes to the confusion.

So how do we separate the startup stuff from the legacy thing?

The family business or any business to have a long-lasting impact has to intertwine itself with business marketing steps. A business could not last without a common terminology often referred to as the target market.

Family businesses are those that have been passed down, either intact or in fragmentary form through generations. Some of these family businesses claim to have roots that reach back to their great patriarch.

A family business is “owned” by its members. It is part of them. A family business is a marketing experiential business. What this means is that the personal life of each family member is heavily influenced by his or her marketing experiences.

Marketing refers to the commercial processes involved in promoting and selling and distributing a product or services. It refers to the commercial functions involved in transferring goods from producer to consumer (www.thefreedictionary.com/marketing).

Since the months of September to November are usually devoted to session planning months, here are twelve strategic steps to make a family business last from generation to generation:

1. Learn good cash management. Family business owners or members should see to it that there is an available cash flow on a monthly basis. In addition, experts advise a once-a-week disbursement for easier monitoring of cash inflow and outflow. Setting up some internal controls can help ensure that cash is available whenever there is a need for it.

2. Establish and maintain committed relationships with clients. This refers to the ability to identify the needs, preferences, and buying habits of regular customers. Generally, family business owners must commit to the specification/s of their loyal customers in producing goods and rendering services that measure up to quality standards.

3. Control Inventory. The basic question is “just how much is enough stock?” There is a constant need to know when to order and how much to order. The key is to distinguish between basic stock goods and seasonal goods since each kind is controlled in a different way.

4. Maintain continuous supply of raw materials. Family business owners must guard against running out of stock when he or she needs them.

5. Be cost-efficient. Costs refer to “All the money a business spends in making and selling its products or services” such as raw materials, salaries and wages, electricity, interest on business loans, etc. Consequently, the following are ways to reduce costs: subleasing, renting instead of buying, asking children’s help, recycling etc.

6. Maintain the quality, features and design of the product.

7. Involve or immerse all the members of the family. This leads to mentoring the successors of the business on critical business issues. Mentoring can either be direct or indirect. Direct mentoring spells out the do’s and don’ts of the family business to the younger family members.

8. Improve or modify the product using the 4 Ps of the marketing mix. Is the product or service still relevant? Is the price still right? Are advertising and marketing strategies still right? Are the products still distributed or the services rendered in the most convenient place for customers?

9. Conduct continuing research on why a customer would prefer your family business over other companies.

10. INNOVATE! INNOVATE! INNOVATE!

11. Make sure that the brand name of your product or service has name recall from one generation to the next generation.

12. Enhance the uniqueness of your family business. What makes your family business different from the rest?

Follow all the recommended steps to ensure a family business legacy. A legacy is a legacy!

Developing policies can save your family business

“WHEN we mix emotional and economic criteria, we open a Pandora’s Box of problems. Few families are spared these unique challenges. Many of these families have ultimately torn their families apart. How sad. But how unnecessary.”

POLICY development cannot be put off forever. Family members must formalize and set down on paper the structure and guidelines under which the family will own and operate their business. Having agreed policies in place and abiding by them reduce the chances that family conflicts will destroy your family business. If you procrastinate, brace yourself for the downfall.

Without agreements on how family members work together in the family business and with different views of what the family business should be about and what should take place, conflict is almost inevitable. Businesses need rules by which to operate – and if they don’t have them, they fail.

What are rules? Rules are authoritative statements of what to do or not to do in a specific situation, issued by an appropriate person or body. It clarifies, demarcates, or interprets a law or policy. Likewise, rules are statements that establish a principle or standard and serves as the norm for mandating action or conduct.

What are rules for, anyway? Rules replace thought and discretion. If you know the rules, you always know what to do. Rules are comfortable. If you know the rules, you never have to stretch too far. Rules are safe. You probably won’t get fired for following the rules.

So how can siblings make some fair rules that will help them live with – if not solve – their differences as they run the family business? In a given setting, they may be relating to one another as siblings, as business shareholders or as operational managers. Again, each relationship must have rules.

And here lies the dilemma, “the business context encourages productivity and profitability, whereas the family context encourages nurturing and acceptance.” To stress this point, is it a Family First Business or a Business First Business?

To overcome this confusion, the family must agree and choose which one is best for the business.

With the choice of either Family First or Business First, the rules set forth for the family business will inevitably move towards the family’s philosophy, mission, size, industry, and resources available. Those guidelines must be consistent with the family’s values.

The next step is to recognize that “the relationship” is not just one relationship – it’s three.

The family: Siblings need to decide, and preferably put in writing, what kind of family they are. What is the nature of the bond? What does the family stand for and what kind of legacy does it want to leave, if any? In short, what are your family values?

The shareholders: The owners of the business – who are not necessarily the managers – must decide what their goal is, and determine the requirements of future inheritors.

Who can own shares? Should the business leave a legacy for the owners’ children or should it be sold before the next generation grows up?

The family business managers: These are the rules for running the business. Can one sibling report to another? What is the compensation for each job? What information will be shared, and in what time frame?

With the relationship divided into its parts, protagonists can decide whether a particular conflict is a family, shareholder or managerial issue, and go to the rule book. Note that this also means that if you can’t abide by one set of rules, you can bow out without affecting your status in the other categories. If you can’t work for your brother and the rules say you must, find another job. You are still a shareholder and a member of the family.

In my work as family business coach in Asia, I have recognized the importance of crafting family policies. These rules or agreements when done correctly can save the business from unnecessary conflict. Family Business Asia lists several advantages:

a) Avoid problems or solve them before they occur

b) Reduce future family tension

c.) Strengthen the family with experience in coming to agreement
d) Clarify your family’s positions and reduce misunderstandings
e) Help the family sort out its values and what it stands for
f) Improve future decisions by ensuring that policy formation is informed and objective rather than made in the heat of battle
g) Create more enthusiasm for and knowledge of the business
h) Increase the likelihood of long term business and family success, survival and prosperity.

The rules highlighted must be applied consistently and clear. When applied fairly, you’ll be able to stop the fires before they start – the key to keeping any company profitable and well-perceived by investors and the public eye. To quote Prof John Ward, “Developing Policies before they are needed creates an opportunity for families to address potentially sensitive issues before they become personalized—that is before they actually apply to someone.”