So many family businesses are making investments for the next generation, which in my family’s case means my children and their cousins. But many families are doing nothing to fully engage all generations of the family, make succession plans for key leaders or develop that youngest generation. They don’t know how to be engaged with the business without being overreaching, so they try to be disengaged. But that can cause even more problems than over-engagement.
I have spoken to many families who make long-term investments and set up the business for success for the sake of coming generations, and yet they’re not doing any work to make sure that the family at the youngest age is ready and excited about being a part of a family-owned business. It’s one of the ways people focus on the business side and forget why the family is important.
If you go the 30,000-foot level, it takes three different entities working together for a family business to be successful. You have to have a good management team. You have to have a strong board. And you have to have a highly functioning, supportive and engaged family.
When you look at all the different risks to a family business, often the biggest risk is the family. It’s the one that can decrease the value of the business quite quickly through lawsuits or big fights. But the family can also endanger the business through unengaged shareholders. A disengaged family is more likely to sell back huge chunks of stock, which decreases the value of the business and ties its hands in terms of future investments.
If you think about engagement from a risk perspective, the best kind of engagement you can get is a family who experiences a high return. Not only do they have a financial return, but they have an emotional connection to the business, how it interacts with the community or the employees, or the products it makes. The family experiences a relationship return in that the individuals feel connected to each other in some way. It has to be pleasant to be together even if you don’t like each other. You have to be able to work together and get along.
When you have strong engagement, you have an environment where the family is adding to the business and increases the bottom line. Positive engagement shows the management team and the board that the family is invested for the very long term, so it makes sense for the business to invest for the very long term as well, and for the board to support that.
Often, families think to be engaged they have to give the business some advice about how to operate. And that’s not helping. It’s not good for the business. If you don’t work in the business you should not be giving business advice.
So the question is: What is engagement if you’re not involved in operating the business? What does the ideal amount of engagement look like?