The resilience of your family business depends on its structure

We find different advantages, disadvantages, and strategies for resilience and longevity in these three types of family businesses.

A privately held family business

In a sole proprietorship family business, ownership and control are transferred or consolidated with one owner. A monopolistically owned family business is structured like an autocracy or monarchy. This ownership structure has proven to be a stable, viable and successful form of long-term family business ownership.

Business issues aside, conflicts over control, inheritance and ownership in families are often vertical between older and younger generations, and generally when and how changes in control and ownership of the business occur.

Coping strategies for sole proprietorships

• Communication, as always, is important in family-owned businesses, with the goal of creating graceful entries when ownership changes hands.
• The older generation owner must be emotionally and financially ready to exit the business when the time comes, and the next generation leader must be prepared for their role as income owner and manager.
• There should be opportunities for the senior member to provide advice and consultation in the business if requested and required.
• The transfer of ownership should be structured to minimize any financial impact on the business owners and operations.
• Any differences in financial resources that may arise between siblings who are not involved in the business should be well settled before ownership transfers.
• The departure of the older generation owner should be celebrated and commemorated, recognizing and formalizing the transfer of ownership and control to the younger generation owner.
• A board of advisors is essential to a sole proprietorship family business to ensure that employees and family receive unbiased outside advice that they may not want to give.

A family business controlled by siblings

In a sibling-controlled family business, ownership, control, and associated power are distributed in the hands of more than one sibling owner. As the business is owned and controlled by more than one person, the management structure is equivalent to an oligarchy (eg two to six or more owners).

The advantage of having sibling owners is that family members often share a common interest in seeing the business succeed. Building on the successes and entrepreneurial spirit of the founding generations, they often seek to professionalize and grow the business to accommodate the expanded ownership structure. The structure of oligarchy, however, is prone to conflict, especially when it moves above brothers and sisters.

Sibling-owned oligarchy structures have greater potential for conflict, with horizontal conflict between sibling owners over control as well as direct conflict with the next generation. Furthermore, the next generation has the potential to create horizontal conflict within itself.

Recovery strategies for sibling-controlled family businesses

In addition to the advice for sole family businesses, sibling-controlled companies should consider the following.

• If not already done, establish a board of advisors with non-family member participation. In addition to seeking unbiased outside advice, it’s important for siblings to get third-party perspectives and reassurance to help resolve potential conflicts.
• Develop a “professional” management structure for the business that applies equally to family and non-family employees and includes procedures and policies such as job requirements, performance reviews, and compensation packages based on position and performance.
• Set clear rules for the next generation to enter the business.
• Set clear guidelines for future ownership opportunities.
• Establishing buy/sell agreements that will not harm the business if called upon.

Now comes the hard part. If the longevity of the business is a family goal, the sibling oligarchy should consider:

• Returning to a sole family business by acquiring shares from other owners or
• Structuring the ownership of the business so that enough ownership of the business can be passed down to the next generation (there may be 10 or more owners) if possible so that no single owner can easily form a coalition or act to control the business. Ability to gain ownership control.

Family owned business

In a family-owned business, ownership and control have passed from one nuclear family. Dispersed ownership does not refer to any generation or multiple owners beyond two, but simply means that the owners are not from the same nuclear family.

The problem with widespread family business is that the oligarchy structure can be particularly prone to conflict as coalitions form and struggle for power and control. This conflict may become more apparent when family relationships are further removed from the established nuclear family.

The decision, therefore, is to decide what kind of ownership structure works for the family and the business. Should you strengthen the ownership, and to what extent – a sole proprietorship or is it enough to avoid the conflict? In any case, this can be costly and is usually a temporary solution as the next generation faces the same or similar dilemma.

Another option is to change the legal ownership structure to better resemble a state corporation or democracy, and spread ownership of the business widely over subsequent generations (10 or more owners) so that no single owner can easily form a coalition. It may have the potential to gain control or ownership of the business.

Resilience Strategies for family owned businesses

• If the longevity of the business is a family goal, the owners should consider changing ownership to resemble a more democratic or “corporate” structure. If family members are willing to relinquish control of the business and the business is large enough, financially stable and capable of developing the necessary infrastructure, then go this route.
• Legally simulate a public corporation structure that is representative of family owners while retaining the benefits of remaining private.
• Organize an owner council for family owners to discuss and share concerns.

At some point in the fragmented, democratic family business, the succession of leadership overlaps with the heirs of ownership. As fewer and fewer shares are held by multiple owners, each family member takes on the role of “shareholder,” as if the family business were a publicly traded company.

• •

So which family business ownership structure has proven to be the strongest over the long term? The generation-successful “democratic” business structure of distributed ownership is often seen as an aspirational model for the most successful family businesses. However, these are difficult businesses to create, manage and maintain.

The future ownership structure is a decision that every family business owner must face. And each comes at a price. Consolidating ownership can lead to hard feelings if not included. Dispersing owners into the representative form of ownership can lead to a sense of control over the business. Staying in the middle with the oligarchy seems like an easy choice with siblings, but this is probably a temporary solution because they may face the same problem later. Regardless of your choice, put your family first, and make a rational and well-considered decision that is best for your family.