Summary

• Family-owned businesses may be unique in terms of their leadership structures, but they require effective governance to succeed just like any other company.
• This article provides a blueprint for getting started, including possible governance structures, their definition and purpose, and the benefits.

You can plan for the future of your family-owned business in many ways, but a strong governance structure is critical for the successful transfer of your company to future generations. Creating a strong governance structure can be a sensitive process when the people involved are your family. Without strong governance, however, a family business may risk its future, including the family’s ability to control the enterprise. According to U.S. Census Bureau data, more than 70% of U.S. businesses are family-owned.

So, understanding family governance and establishing an effective family business governance process is as important as ever. There is a lot to balance when running a family business. Often, governance goes to the back burner because it may not be an urgent issue today. Here is a blueprint for getting started in thinking about governance so it doesn’t become an issue tomorrow.

What Is Family Governance?

Family governance is the system, process and structure for business owners to make decisions that affect their family-owned business. Family governance often encompasses the vision for the business, specific goals that align with this vision, a leadership hierarchy, rules around transitioning business leadership or ownership, and decision-making guidelines. It's also used to guide a family's roles and responsibilities related to their business.

What Are Potential Governance Structures?

Family businesses can be structured in any number of ways.

Distributed

• The most common model for family-owned businesses, most or all family members have an ownership stake in the company, even if the business doesn't directly employ them.

Owner/Operator Model

• One person or a couple owns and controls the business.

Partnership

• Only family members with a designated role in the business manage and financially benefit from the business.

Nested

• Family members own joint assets within the company but also have separate ownership rights over different parts of the business.

Public

• Some of the company's shares are publicly traded in the stock market, and the family retains private ownership of the remaining shares. You'll often find Class A and Class B stock shares under this model.

Each structure has advantages and disadvantages depending on:

• Your family's needs and dynamics;
• Individual family members' involvement in the company, experience and skill set;
• Potential tax and regulatory implications;
• Goals for your company’s future; and
• Your plan for the transfer of generational wealth.

Accordingly, a family should carefully consider which structure works best for them and the business.

As part of its governance structure, a business also may have a board of directors or advisors. This governing body can help to formalize processes and make important business decisions, such as whether to acquire another company or move ahead with certain strategic investments. It can also serve as a neutral party to resolve any business conflicts that may arise.

Three Advantages of an Effective Family Governance Plan

Effective governance is important for several reasons:

Protects the Family’s Interests

A family business is often one of a family's primary source of wealth. If the business isn't managed properly, it could affect the family's financial sustainability for years to come, in addition to creating a risk for all employees’ financial futures. Effective governance can create a framework for decision-making and a structure to help preserve family wealth in future generations. It can also help the company manage risks that could affect its ability to stay in business and grow.

Supports Succession Plans

Strong governance is crucial for succession planning. Though most family-owned businesses identify another family member or set of family members as successors, only 30% of family-owned businesses survive into the second generation. Succession planning guards against future disruption in how the company may be led and ensures proper controls are in place for when a company's leader or owner may eventually retire, or passes away suddenly or becomes ill and can no longer run the business. It allows the business to identify future leadership early on and plan for it. The current business leaders can begin training future leaders for their eventual roles, and ensure the skills and experience to manage the business are in place when the time comes.

Enables Adaptability and Strong Operations Over Time

Though family governance is a vital aspect of effective business management, it should be adaptable. Businesses and market conditions evolve, and governance structures should change with them to ensure the business adapts and remains resilient. Generational changes within the family or family dynamics may require changes in the company's governance. Younger generations may want less involvement in the business, siblings may differ on their ideas for the company's direction, or the family may decide the business could benefit from adding experienced outside executives to its board of directors. The business also may grow, merge or sell off parts of its assets, which could necessitate a change or transition in the ownership structure.

Choosing the Right Governance Structure for Your Business

Good governance is critical for forging good business practices, and it can have a meaningful and measurable impact on a company's future success. Family businesses may be unique in terms of their leadership structures, but they require effective governance to succeed just like any other company. Proper governance can bring more organization and transparency to the business, enable better decision-making and help ensure the business lasts for generations to come.

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Curious to learn more about governance structures for family businesses, and how your organization might benefit? Contact a member of the Eastern Bank Commercial Lending team for insights on how they can help your business succeed.
 

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