Morgan Stanley
Wealth Management

Building a Family Enterprise That Lasts

Successful family businesses establish a shared mission and succession plan to endure for generations to come.

Key Takeaways

  • Establish a process to evaluate the family’s next generation for leadership in the business, using an assessment that measures qualifications, skillsets and interests.
  • Cultivate interest and a sense of accountability for business decisions and share information about the family business and investments.
  • Consider how the enterprise might expand into related lines of business to help prolong the longevity of the family enterprise.

While building a successful family business is a remarkable accomplishment in its own right, positioning future generations to build on that foundation can be far more challenging. Many founders want to continue creating long-term wealth for their families even after their succession.

 

In keeping with the adage “from shirt sleeves to shirt sleeves in three generations,” many affluent families fail to maintain their business and preserve their wealth beyond the founder’s great-grandchildren.

 

For many families, a major obstacle is failure to adequately plan for the future: Some don’t identify and nurture family talent or properly reinvest capital. Or they’re too slow to make necessary business changes. In some cases, their mission and goals may be unclear or inflexible. 

 

Fortunately, there is a path to multigenerational prosperity. When families take steps such as establishing shared goals, diversifying their business’ revenues and prioritizing the education of future generations, it can help to ensure both the future success of the enterprise and an enduring legacy for the founders.

 

i
For many families, a major obstacle is failure to adequately plan for the future.

“A successful family enterprise isn’t just the business itself. It includes all other ways in which the family builds value and connects, such as a family council, a family foundation, a family office, and all the assets and activities the family does in some form of collaboration. It includes the individuals who make up all aspects of the family enterprise—their motivations, talents, aspirations and common mission,” says Andrew Hier, Partner and Senior Advisor at Cambridge Family Enterprise Group (CFEG), a family enterprise advisory and education firm. “Successfully pairing all of these elements together takes careful planning and time.”

 

Here are six key priorities:

 

  1. 1
    Establish a shared mission

    Family unity is the cornerstone of a lasting family enterprise because it allows for smart decision-making around the longevity of the business. It facilitates the family to move in the same direction in support of the same goals, which leads to smart decision-making around the longevity of the business. It can also lead to an understanding of the family’s shared mission and core values as it pertains to the business and the family itself.
  2. 2
    Implement family governance

    Family governance is a framework for family direction and decision-making based on a shared mission and goals, and it is often separate from the operating businesses. Some families may hold a Family Assembly or regular meetings during which family members learn and plan for the future. A family-council working group can help propose policies on matters such as family employment, family unity, family communication and talent development. Some families create a separate ownership council, composed of some or all of the family business owners, to align on what the owners want for the family enterprise, including guiding principles on direction, risk management, capital allocation and dividend policy.
  3. 3
    Evaluate the next generation

    Each member of a family has a unique set of skills and interests. It’s important to identify roles for different family members that capitalize on their own passions and strengths, with the intention of aligning their interests with those of the business.

     

    Establish a process to evaluate the next generation of leadership and ownership using an assessment that measures qualifications, skillsets and interests. Then, use those assessments to map out development plans. Some may work in the family business; some may occupy other roles in the larger family enterprise. Remember, there are many roles—shareholders, board members, philanthropic leaders, wealth creators, wealth oversight, governance members, family council leaders—and there should be a place for everyone who wants to participate and prepare themselves.
  4. 4
    Prioritize education and communication

    To create a business that succeeds from generation to generation, the next generation has to be excited about it. Cultivate interest and a sense of accountability for business decisions and share information about the family business and investments. Teach younger generations the family history, values and basic leadership and ownership skills.

     

    “If you want to create a business that succeeds from generation to generation, you have to allow the next generation to become excited about what you’re doing and help them become qualified to contribute,” Hier says. Some families set up an education committee to direct learning and keep family members motivated.

     

    Hier says successful multigenerational families develop their family identity and culture as "learning families", ensuring that each generation acquires the critical skills and understandings necessary to become good stewards of all aspects of the family enterprise. “These families prioritize learning together as an ongoing, life-long activity.”
  5. 5
    Think about how to diversify the business

    Families may want to consider how the strengths of the current business may apply to other sectors or industries that show growth potential and that align with the family’s values, skills and interests. 

     

    Take, for example, a prominent family whose business originates in news publishing in markets with many automotive advertisers. From there, the business can successfully expand into content curation and product research for the auto industry, ultimately becoming a leader in those areas as well. Such thoughtful diversification into related lines of business can be key to the longevity of the family enterprise.
  6. 6
    Make a succession plan

    Families that plan to transfer a business to heirs should consider what a successful transition of ownership, governance and management will look like for the next generations. For the family member(s) currently owning and/or running the business, this process may include important financial and ownership decisions around: 

     

    • Gifting equity to children—either outright or in a trust—in a tax-efficient manner
    • Bequeathing equity at death, with an eye toward addressing any family conflicts that may arise based on shared ownership
    • Ensuring there is sufficient liquidity to pay estate taxes after you pass

     

    There are also non-financial decisions to make when planning for succession in a family enterprise, such as:

     

    • The role of the family in the organization
    • The leadership model and governance structures that will fit the next generation’s skills and the evolution of the family enterprise
    • The process of gradually transferring responsibilities and authority as milestones are met
“If you want to create a business that succeeds from generation to generation, you have to allow the next generation to become excited about what you’re doing and help them become qualified to contribute.”
Andrew Hier
Partner and Senior Advisor at Cambridge Family Enterprise Group

Consult with a Financial Advisor  

Creating and maintaining a family enterprise that lasts across the generations of your family can, in some ways, be as challenging as building the original business itself. A Private Wealth Advisor can help you identify strategies to maximize investment opportunities, tax considerations and succession planning.

 

A Private Wealth Advisor can also help you evaluate longevity in consideration to selling your business. Many business owners measure their family’s success by how long they’ve been in business, as opposed to growth or profitability. In some cases, a family could be best served by selling a business and pivoting to another venture. It’s important to evaluate if exploring other options is right for your business. Having a supportive team of stakeholders, including your family and wealth advisors, can help you consider the right option for the business.

 

Hier spoke alongside Morgan Stanley thought leaders about successful family enterprises at a Private Wealth Management event for business owners in Philadelphia.

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