The 5 C's of Generational Continuity

By Dave Specht

There is no magic recipe that will guarantee the preservation of your family relationships and the perpetuation of your business. There are, however, five key items that if not planned for will almost assuredly lead to heartache, negative family dynamics and a poor chance at business succession. As you consider all the technical elements that families need to address, please seek to humanize every step of the process.

1. Cash flow

Cash flow clarity is key. It is crucial that every business owner has a clear understanding of the business cash flow. Furthermore, it is important to “stress test” the operation to see what types of shocks specific to input costs or prices it can withstand. Besides the cash flow of the business, the operation needs to consider the cash flow needs and sources of the retiring generation. If retiring owners do not have assets accumulated outside the business, then their retirement would logically be funded through the successful operation of the enterprise, which will undoubtedly lead to second-guessing and continued attachment by the founders.

Questions to consider:

• From a cash flow perspective, how ready is the business to invite another family member back?
• From a cash flow perspective, how prepared is the retiring generation to create sufficient cash flow for retirement without supplementation from the business?

2. Contingency plans for management and ownership

Every business operation needs to have a documented, communicated, and frequently revisited contingency plan for both management and ownership.

•  A management contingency plan looks at the people in the operation and identifies the duties and decisions made solely by one person. When single individuals make purchasing, marketing, and other decisions by themselves, risk is created and continuity is jeopardized if they become incapacitated, die, or leave the business. Therefore, each business operation should identify these risks and train back-up personnel on how to minimize them.  Plans should also be considered as owners age and want to slow down.
•  An ownership contingency plan provides and establishes clarity regarding the flow of assets should any owner pass away, become disabled, or retire. Although it sounds like a simple and logical expectation, few have a clearly documented and communicated plan in place. The flow of ownership should not be a surprise and should include conversations about debt assumption and the rights, roles and responsibilities of owners.

Questions to consider:

• If one of the key managers passed away or didn’t come to work on Monday, how big is the knowing/doing gap between them and the person that would be called to do their job?
• If one of the owners were to pass away tomorrow, how would ownership flow and how would the business be impacted?

3. Compensation

Often overlooked but always present is the question of how people are compensated.  As a family business invites a member of the rising generation back, it is crucial that there is clarity around their compensation.  Compensating individuals for the job they do is always a best practice.  When compensation is blended with gifting or is not tied to the job being performed, there will be confusion and unintended consequences.  Paying siblings or cousins the same amount when they do vastly different jobs almost always leads to problematic situations of either entitlement or feelings of unfair treatment.

Questions to consider:

• How aligned is the family member’s compensation in the business with the job they perform?
• If a non-family employee was asked to step in and do the same job as a family member, would their compensation go up, down or stay the same?   

4. Communication

Successful enterprises create structures and expectations for how shareholders and the families that control the business communicate; however, this is where many businesses fall short. It is crucial that a regular pattern of communication be established to keep shareholders informed, provide a venue for questions, and establish an environment of transparency and trust. Regular family meetings with structured agendas and a place for people to ask questions without fear of retaliation are key.

Questions to consider:

• What venue is there for family members to become educated about the family business and to ask questions?
• What conversations should be held to help shape expectations and prepare the rising generation?

5. Conflict

Conflict is not bad, it’s actually normal; all humans undoubtedly have different perspectives and opinions on things. Deciding how you will handle conflict when you are not actively in conflict is a best practice. Thinking that you will always avoid conflict is not a good assumption and will leave you lacking the structures and understanding required to move through conflict with your personal relationships intact and your business moving forward.

Questions to consider:

• What processes exist to help resolve conflict in an organized and fair manner?
• What are the financial and relationship costs of not having a clear process for dealing with conflict in the family business?

One of the greatest business legacies advisors can leave is a group of clients that are positioned to preserve their family relationships and perpetuate their businesses (if they choose to do so).  Although it’s important to minimize taxes and protect assets from creditors and predators, our highest aspiration should be to encourage families to keep their most important family relationships in good working order.  

About the author - Dave Specht serves on the Philanthropies Gift Planning Leadership Council.  He is the Director of the Global Family Business Institute at the Drucker School of Management.  Dave attended all three BYUs (Utah, Hawaii and Idaho).  He lives in Basin City, WA with his wife Taneil and their 6 children.  He has two children serving or preparing to serve missions for the church (his oldest daughter is in Toronto, Canada and his oldest son has been called to Salt Lake City West Mission). Contact him at davespecht@gmail.com.