Like many businesses, family-owned businesses tend to have very entrepreneurial origins, with the founding family members taking an all-hands-on-deck approach. As the business matures, however, it’s important that roles become more clearly defined as the family grows and evolves.
Newer generations may not feel the same commitment to the business — or have the skill set required to run it efficiently. Yet they may still expect to benefit from it financially. Unless family businesses are managed with care, disagreements and divisions can threaten its continued success.
In this post, we’ll look at common family business ownership models as well as provide some guidance for family owners looking to evolve their businesses.
Here are five of the most popular family business ownership models:
- Owner/operator — This simple ownership approach keeps ownership of the business under the control of one person (or couple).
- Partnership — In the partnership model, only leaders in the company can be owners and benefit financially from it. For the partnership model to work, each partner should contribute more or less equally to the business’s success.
- Distributed — In this model, ownership is passed down to most or all descendants, whether or not they work in the company. Changes in the compensation policy may be required to reward those who are actively contributing to the success of the business.
- Nested — In the nested model, various family branches agree to own some assets jointly and others separately. This model is “nested” in the sense that smaller family ownership groups sit inside larger ones. The nested model can reduce tension among branches while keeping the family together.
- Public — There are two basic versions of the public model. In the first, all or a portion of the business’s shares are publicly traded while, in the second version, the business behaves like a public company while remaining privately held. In both cases, the responsibility of running the company is in the hands of professional managers. The owners are relegated to minimal roles, often limited to electing board members. The public model works best for mature companies with numerous owners who are either too dispersed or disinterested to take an active role in running the company. It’s also effective for companies that require large infusions of outside funding.
From root to trunk to branch, how new generations can impact the business
The founding family members can be thought of as the business’s roots and trunks, while newer generations can be viewed as its branches. If the roots and trunks have created a strong business, the branches will have the foundation they need to continue building on its success.
But branches sometimes grow in different directions and that can cause disagreements and division within the business, and the family. Decision-making can become bogged down and opportunities can be missed.
Is it time for your family business ownership to evolve?
Generation to generation, challenges grow, as do the number of shareholders. Key to maintaining a healthy and vibrant business is understanding that, at its core, the business is a living, evolving entity and should be treated as such. Again, change is often the result of input from new generational shareholders, but it must be considered. Leadership must continually ask themselves if the established ownership structure addresses the needs of the current shareholders. If not, is it time to change the ownership structure?
Or will less drastic changes, such as a formalization of roles, address the issues?
What’s more, newer generations can often lack the skill sets and willingness to contribute time and effort to the business. That can have a profound effect on the business as well. If new family members unsuited for the business are insistent on having an active role, the business could potentially suffer. Better to define a lesser role with clear boundaries for them in the hopes that their skill set, and commitment will evolve over time.
Beyond ownership restructuring: the liquidity event
If it’s decided that an ownership restructuring is not desired but there are family shareholders looking to exit the business, a liquidity event can be held that offers the exiting family members and/or shareholders an opportunity to sell their shares. Every company is unique, but many require that siblings and cousins get the first right of refusal for any shares that are offered for sale.
Talk to us
If you’re looking to make a change to your family business, visit your local branch of California Bank & Trust. We can walk you through how any proposed ownership, or other, changes could impact on your banking and offer you helpful solutions.