Any business owner likely knows the dangers of family feuds and litigation, especially when dealing with a large, illiquid asset like a closely held business. Aligning all family members around the same set of goals can be tricky, especially when considering the exponential growth of family members over generations.

However, the approximation of family harmony and business interests can be achieved by borrowing from a time-tested process. Business Strategy 101 tells us that shareholder value is ultimately measured by a company's ability to gain and maintain a competitive advantage in its market segment. It is measured by generating financial metrics on the industry. Not every business generates a competitive advantage, but most strive to do so.

But how did you get to where you are today? You've probably used some variation of the ideas below as you've built your business. Imagine how the same principles you used to develop a competitive advantage in your business can be applied to your family to maintain harmony and successfully pass ownership of your company.

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1. Spend time on your strategic vision

Our experience in advising families for a generation is that in business, the endless questions are 'What is happening in our industry? How are we positioned and what do we need to do to gain and maintain a competitive advantage?'

In our experience, successful entrepreneurs consistently undertake an S-WOT analysis to identify strengths, weaknesses, opportunities and threats to their business. We often work with companies to identify gaps between optimal and current state and develop a plan for implementation. Then, we monitor progress and make adjustments to keep our plan on track.

Successful families ask similar questions. As we look down the road of life, what is happening to our family? How are we positioned to meet the financial objectives of all shareholders while maintaining the fundamental principles that keep the business competitive?

Developing a SWOT analysis for a family will reveal the gaps between the optimal state and the current state, and we can identify ways to create alignment between the needs of the shareholders and those of the business. A well-developed family guide and a well-designed questionnaire can be put in place so that the business owner/head of the family can seek the voices of many family members to help define a strategic vision for the family, guided from a mission statement, the rules. of the road and a code of conduct.

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2. Provide the financial and leadership resources to implement the strategic vision

In business, a competitive position can be eroded by failure to anticipate leadership change and the need for financial resources. Highly strategic companies are well prepared to adapt quickly. Given the demographic age of the owners of most private companies (roughly half are over 55 years old), developing a management transition plan that identifies, trains and develops future leaders is a major driver of value, whether you keep or sell the business.

Similarly, successful families address the financial needs of current and future shareholders. Harmonious families ask: Who are the shareholders who best fit our family vision? How do we optimize the assets current and future shareholders need to meet their goals?”

Especially for business owners nearing retirement who want some liquidity, this goal may be at odds with the business' needs to reinvest for growth. These two objectives can be more easily aligned if you anticipate these changing dynamics before they become a problem. Addressing potential conflicts early on and developing and communicating a plan to address them is simply SMART (Saves Money and Reduces Tension). As a family, you can actually end potential conflict with an agreed-upon and written purchase-sale agreement.

Developing a family council is similar to developing a leadership transition team for business. You identify, train and develop the initial team of family council members. Their role is to understand and communicate business needs to stakeholders, educate them on key financial planning issues and create a plan to identify, train and develop their replacements.

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3. Align incentives with strategic initiatives

One of the biggest gaps we see as business advisors is the lack of alignment between incentive plans for key employees and the company's strategic initiatives. The old saying, “You get what you push for,” it's just as fundamental a core business exists, but it's often the biggest obstacle to a successful business transition.

Strategic business initiatives often change as the environment changes. Similarly, family shareholders need to know that their personal strategic family initiatives are aligned and that decision makers are fulfilling their fiduciary responsibilities to all shareholders by making changes as conditions change.

The two main forms of cash flow from a company are the W-2 (Wages/Compensation) and the K-1 (Investor's Return of Investment). Reconciliation occurs when you provide fair market compensation (W-2) for family members who run the company and provide the next rate for non-family personnel in the same role, thereby not diluting K-1 income for shareholders.

Owners should develop a dividend policy that ensures the company has the financial resources to compete and outlines how and when excess working capital can be distributed to shareholders. You may be fortunate enough to maintain a certain level of distributions so that each shareholder can incorporate those distributions into their personal financial planning, cash flow, diversification and wealth planning.

Finding family harmony

Often, financial advisors use scary statistics about the rate of business failure and wealth transition, the high cost of inter-family litigation and the destruction of what was once a happy and harmonious family. Additionally, advisors often make it a mystery how you can develop a family plan, which deters business owners from getting started in the first place. The common refrain from unsuccessful family planning attempts is, “We spent a lot of time and money, and it was very touching, but we never put anything tangible in place.”

While there are likely to be bruises from family issues that will test even the best laid plans, the only important statistic in the end is: Were you able to develop a successful succession plan or not?!

The same processes of integrating a vision, financial resources and leadership with close incentives and quality communications that made your business great can make your family happy and harmonious too. An experienced family business advisor can take your proven and successful business model and help you adapt it for your family. You will know quickly and more intuitively how to identify dynamics and objectives with different goals and ways to close the gaps.