Why more families are turning professional

Cost pressures are forcing many family businesses to professionalise their operations, but getting it wrong can be disastrous.

It’s a strategy aimed at keeping the family business growing, making it more profitable and creating a seamless succession plan.

Professionalising the family business sets the stage for future growth, allowing the business to develop more rapidly, attract higher-quality employees and give family members the professional education they need to manage effectively. It also helps mangers prepare for valuation or the search for capital from private equity, patient capital, or traditional lenders and plans for succession.

Professionalising the family business achieves three things: it ensures the business is globally relevant and a leader in its industry, it works out how the next generation of leaders will be integrated into the business and finally, and it helps decide who will own the business further down the track.

It also helps reduce the impact of the inevitable family conflicts that arise from time to time. It’s only a matter of time before these conflicts come up. If they don’t happen in the first or second generation, they will happen in the third.

More family businesses are turning to it because of these pressures. A recent PricewaterhouseCoopers study found that 40 per cent of family businesses globally believe that professionalising the business will be a key challenge over the next five years.

All this requires new management functions and structures, and upgrading the existing business systems. Operational processes also need to be examined and improved. Non-family executives would have to be brought in and there would have to be greater clarity about the roles of both family and non-family employees, which would require detailed job descriptions, specific key performance indicators and measurable performance targets. This allows the business to encourage, manage, monitor and measure the contributions of family and non-family members in a non-personal way. It also helps prepare the family for ownership and leadership transitions.

That said, it is hard work. As the PricewaterhouseCoopers survey pointed out, professionalising the family business is difficult because it involves both head and heart. As a result, it often gets postponed because it raises so many intractable issues.

David Harland, managing director of family business consultants FINH, says professionalisation is a much bandied around term but one mistake many consultants make is using a model that doesn’t work for family businesses. Putting in a board, bringing in job descriptions and KPIs work well in the corporate world but that can be disastrous if the family dynamics are ignored. What makes it even more complicated is that every family is different. A tick box approach might work well with corporates but not with every family business.

“The term professionalisation is used by institutions who want to help family businesses and one of the weaknesses in that approach is that you get a lot of the market coming and wanting to use a corporate model and simply overlay it on top of a family business model without understanding the nuances of family businesses,’’ Harland says. “There are many risks involved in that.’

“Family businesses are almost social emotional eco-systems. These form the social emotional value of the company, and if you don’t pay solid regard to those systems and want to formalise a process or put in place what would otherwise be appropriate for a more widely held public company you can destroy the fabric that’s the underlying value of the business.”

What are the signs that a family business has to be professionalised? It could be that the business needs external capital to navigate a liquidity event or grow. Maybe the founder has little time for strategic planning and taking the business forward. It could be that there are lingering family issues that are impeding business growth? Or maybe there’s a high turnover rate for non-family employees.

Harland says the key lies in integrating the professionalisation model into that commercial-social-emotional matrix that’s behind the family business,

“You bring the discipline that’s normally found in any business, no matter who owns the business, but how you integrate it into that social emotional system is the trick.

“One integrates it by having a knowledge of how the system works first, because if you try to integrate anything without understanding how the existing system works that’s where the destruction starts. How you do that is to understand the ownership structure and the vision and the mission of the owners of that business. Without understanding that, you leave yourself open to disconnecting the business from the family and therefore the inherent value.”

He says the biggest obstacles to professionalisation are around liquidity and capital.

“Sometimes family companies are very cautious with their capital,’’ he says. “The evidence suggests that they don’t take on debt easily and they probably want to retain control at 100 per cent and may not have sufficient capital to grow the business in the pathway that the business probably needs and at the same they are probably looking for some liquidity for the outgoing generation and then how do you prepare for the incoming generation.”

How do you deal with that? Identify the owner’s strategy, and that’s not necessarily about the business. “What’s their vision and mission for the future as a family group?’’ Harland says.  “Do they want to hold it at 100 per cent, do they want to sell it? Do they need more capital or take some capital off the table? All that aligns with the strategy.”

He says the best way to professionalise is to have a discussion with all the family members, and that’s often when hard truths have to be confronted. The owners might well hear stuff they’ve never heard before. “The best outcome would be sitting down with the whole family group and listening and understanding their needs and where they’re all at,’’ he says. “In many cases that’s the start of the communication process because typically they don’t do that,” he says.

Professionalising creates better lines of communication in the business.

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