How to Keep it in the Family
What do a Japanese inn and a cymbal company have in common? They’re respectively the oldest and longest-running family businesses in the world. This is no small feat. Since the year 718 A.D., 46 generations have successfully managed the Houshi Ryokan, a quaint hotel in western Japan.* Founded in 1623, the Zildjian Cymbal company is on its fifteenth generation of ownership.*
These operations are proof that family businesses can not only last, but thrive, for generations. How? Successful succession of family businesses comes down to communication, planning and trust. Exploring and answering five foundational questions can help your family establish those key pillars for a smoother succession process.
Who will have control? This is the most critical question in a succession plan. It’s often a good idea to keep control to as few persons as possible. Even a partnership has a managing partner. When choosing a successor, focus on competence, rather than relationship or status. Does this future leader have the operational and interpersonal skills necessary to be at the helm? Timing is also important — a successor shouldn’t come on too early or too late. Consider identifying (but not announcing) a candidate who can be steadily readied for the position by the current business owner.
Who will have ownership? Keep in mind that control and ownership are two distinct rights. Control can be separated from equity ownership using various legal tools. While there is no optimum number of owners, having too many can bog down the decision-making process. In the succession plan, families will also want to specify what type of owner each individual will be (active or inactive) and include relevant provisions for dividing up assets and buyouts. As a general rule, the family business owner should not give ownership to key employees.
Who will manage? Day-to-day managerial authority and ultimate business control are two distinct rights, so the succession plan should clearly spell out managerial duties. As with successors, choose competent mangers who possess the skills necessary to lead successfully.
Who will be employed? Wealth should create options rather than force people into career paths. Participating in the family business should be voluntary, not obligatory. The business and relationships can suffer if employment is not based on competence and merit. When possible, it’s a good idea for families to formulate observable, measurable and specific standards regarding employment which address educational and experience requirements, salary ranges, job descriptions and job performance.
Who will receive money, how much and when? In addition to employee salaries, take the time to clearly define how other types of compensation will be handled and divided. This includes profits, buyouts, real estate, stocks and more. Children should understand the difference between fair and equal inheritances.
Other considerations:
How should in-laws be involved? This largely depends on your individual circumstances. General guidance is for the family business owner to avoid giving ownership to in-laws and opt for treating them like key employees (if they indeed are) who can provide proportionate input when necessary.
Who should serve on the board of directors? For most family businesses, it is prudent to include at least two outside directors who are not employees, family members or beholden in any way to the family or the company (e.g., advisors or consultants). Outside directors provide objectivity, candor and broad ranges of experience.
Related Content: Expanding a family restaurant business
The Chicago-based restauranteur and president of Lettuce Entertain You, R.J. Melman talks about his experience successfully taking over a multi-generational family business that spans ~120 restaurants and 60 brands across the U.S.
* Ho-shi.co.jp/en: Houshi Ryokan, accessed July 2023; GuinnessWorldRecords.com: Oldest Family Business, accessed July 2023.
*Zildjian.com/pages/brand: The Zildjian Brand Journey, accessed July 2023; GuinnessWorldRecords.com: Longest Running Family Business, accessed July 2023.
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