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The 5 C's of Generational Continuity

By Dave Specht

portrait of a man

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:

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.

Questions to consider:

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:

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:

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:

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.

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