Preparing for Family Business Ownership

My father had just finished building a carpentry shop for his impending retirement when he had a fatal heart attack. Suddenly, he was gone, and I was a third-generation owner in the bank where my father had been a vice president. After the funeral, my siblings, my mother and I met to figure out how we would handle our new roles as owners.

None of us knew much about the bank’s operations. Because they both had accounting degrees and business experience, we agreed to have my two oldest brothers represent us on the bank’s board. (They had also declined earlier invitations to join the bank.)
Even though we knew we would one day be owners, we had done little to prepare ourselves. My father rarely spoke about the bank, and we didn’t ask questions. Knowing what I know now about family business, here are eight questions I wish I had asked, and I encourage business-owning families to find ways to discuss them:

1 What does the owner see as the business’s mission and values?
» Although I occasionally heard my father make comments about the bank, he didn’t articulate his views about its mission. He didn’t talk about why his father had started the business or about guiding values. It would have helped if we had had a written statement of mission and values.

2Who are the key employees
and stakeholders?
» Without my father, we didn’t know whom we could count on for good advice. We didn’t know the employees and other board members. We didn’t know about agreements my father had with stakeholders. Written guidelines about whom to contact and what those contacts could do for us would have been very helpful.

3What is the business model?
What must occur for the
business to be successful?
» As we assumed our role as owners, we needed to know what made the bank financially successful. A brief written summary of the following would have helped: Who were the target customers? What parts of the business were most profitable? What must happen to maintain customers and profitability?

4What is the meaning of the business’ financial statement?
» We had never seen a bank financial statement. It would have been enormously useful to have had my father review and explain bank statements so that we could understand and interpret them. He could also have kept us apprised of the bank’s financial performance.

5What is the value of the business? How is that value determined?
» Ultimately, we ended up selling the bank. Many years later, we found that the bank was undervalued when it was sold. It would have been very helpful to know the bank’s value and methods for valuation. In retrospect, we could have also cultivated a relationship with a competent lawyer who could guide us in valuation, preparation for selling and the actual sales transaction. We relied on the bank’s lawyer, which was a mistake.

6What is my role as an owner? How should I prepare myself for that role?
» Many people attended my father’s funeral. Some customers took us aside to express gratitude for my father’s helpfulness and generosity. From this and other information, I got the sense that both my father and grandfather viewed themselves as stewards for the bank, employees and the community. It would have been very helpful to obtain my father’s views about stewardship as it related to ownership, to have become acquainted with members of the board and to have observed board meetings.

7What are the PREVIOUS owner’s desires? What are his/her guidelines and recommendations?
» When we suddenly became owners, we could only guess what our father expected of us. And we all had different points of view. For many families, this kind of uncertainty leads to escalating and divisive conflict. An owner’s written guidelines and recommendations could provide invaluable guidance for new owners.

8When can we meet and learn to be effective owners?
» Regular, formal meetings could allow an owner to collect his/her thoughts and discuss the issues outlined above. During these meetings, current and future owners could learn about the business and meet with key business stakeholders. They could invite experts to educate them about business, communication and decision-making. To maintain family relationships, they could also include a separate time for recreation and entertainment.

In summary, with some planning and communication, my family could have been far better prepared to be owners. And we might still own the bank. Although the profits made from the bank sale were nice, I believe dividends received over time could have far exceeded profits from the sale. And we would still have a business that had been in the family for two generations.

« Ritch Sorenson, Ph.D, is a nationally known researcher and educator in Family Business. He leads the Family Business Center at the University of St. Thomas to help educate family business owners through university classes, an undergraduate major and an Ownership Academy which begins this fall.
(familybusiness.stthomas.edu)