There comes a time when most families seek to sell their business, whether it be five years after its creation or two hundred years. The main reasons for the sale of a family business are usually retirement and/or lack of succession, but sometimes a strategic buyer makes an approach and the family is simply tempted to cash in. So, even if there is no immediate plan to sell, it’s usually in the family’s best interest to have the business in a sale-ready state at all times. How the family operates the business has a major impact on its saleability and ultimately its value of sale. Here, Natalie Wright , Head of Family Business at Mazars shares ten tips that will help achieve maximum value as well as a smoother process: Keep your customer base as broad as you can. Concentration amongst only a few customers increases risk and damages value. Consider your customers and customer relationships carefully and lock them in contractually. Long terms relationships with customers, enhanced further by forward visibility through contractual tie-in, gives buyers confidence that they will continue to buy from you. This adds to value. A churning customer base or a need to continually win new customers is a devaluing factor. Ensure that there are others in the business that are involved in the key customer relationships and general activity within the business. A buyer will want to see a sustainable business that can continue to operate once the family exits. If not, they are likely to tie you to the business longer term and will want to pay for the business over time rather than in cash up front. Lock your key people into the business. Whether you sell or not, these are of high value to you. Share schemes are a great way of doing this and incentivises the employee to help you grow the business. An EMI (Enterprise Management Incentive) share scheme is HMRC approved, is attractive to employees and is very tax efficient for the employee and the business. Manage your working capital carefully. Too much cash tied up in stock and debtors can be unattractive to a buyer and seldom adds to value. Cash sat in the bank definitely adds to the value. Take tax advice on the ownership structure of the business. Although rules changed recently, Entrepreneurs Relief still exists. Better to be taxed at 10% on the sale than 20% if you are able to. Leave it too late and you miss the opportunity. There is also pre-sale planning that may only be available to you if you action it before the transaction and where you have a sizeable legacy, it is important to protect it. Ensure that you prepare good quality financial information at all times. A buyer will expect to see this. Make it easy for them and keep it updated. Speak to others that have gone through a sale process to understand how the process worked for them and what they would have done differently with their business if they had the opportunity. It’s important to go into this with your eyes open and to maximise the opportunities and limit the risk. Think through the cash needs for you and your family for the future – get a personal cashflow forecast. Can you afford to sell now? What price would you need to get for the business to make it work for you and is your business worth that? Knowing your number can help once you get into negotiations as you can have peace of mind in knowing what you need to meet all of your objectives. Keep your premises clean and tidy. First impressions count. It is amazing what difference a coat of paint can make to the appeal of a business to a buyer. So, even if a sale is not on your agenda right now, it pays to be ready and to know the options. The above are good business practices anyway and you never know when someone will come knocking on your door. It is usually when you least expect it.

Family charters are becoming increasingly popular. But what are they, and what can they do to enhance your business? There is an amount of uncertainty surrounding family charters, but their basic nature is easy to understand and they can be a real journey for a family business in the process. Leading family business consultants define the family charter as ‘the written, explicit set of guiding principles that provide family members with a sense of identity and mission that transcends their rights as owners and their roles in the business.’ Essentially, the family charter supports other governance structures and legally binding agreements within the business, such as the business plan and the shareholders agreement. It also covers areas that will help to establish a framework for addressing the different roles that family members have within the business. In fact, there are a number of alternative terms in common use, including family constitution, family creed, family agenda and family continuity plan. However, more important than the name is the content and what it can do for the family business, ironing out some of the grey areas, providing a framework for the family going forward, and helping those not involved in the day-to-day running of the business keep in touch and make sure that their views are heard. Areas that tend to be featured in the family charter include: Family vision statement Family mission statement Family values Management philosophy Family jobs and remuneration Contribution of the family to the business Leadership Share ownership Composition of the board of directors Communication Conflict resolution measures Training and education of succeeding generations Treatment of employees Amending the family charter Each of these areas will be addressed with a clear statement, agreed by all family members. For example, statements could include: Family Vision Statement The family seeks to leave a legacy that reflects pride in the business, recognising the contribution that the family has made to the local community, and portrays the family in a positive and respected manner. Training And Education Of Succeeding Generations The family seeks to encourage the education of succeeding generation, formally and informally, socially and academically. The family will continue to inform and educate the next generation about the business an offer work experience opportunities as a matter of course. Contribution Of The Family To The Business In recognition and appreciation of the enormous contribution to the business made by the founders and the previous generations, the family will use best endeavours to ensure the history is maintained for future generations by means of an ongoing documented record of the family’s involvement in the business. Crucially, the family charter is not plucked fully-formed out of nowhere. A key part of its benefits are not simply in using the document going forward, but in the process undertaken by the family in the creation of the document in the first place. It provides an invaluable opportunity for all stakeholders to address the bigger picture, and to discuss aspects of the family business which might never otherwise be addressed in a day-to-day context. Determining the collective views of the family and what they want for the future can be a very powerful exercise. The discussion provides an invaluable forum for different views to be aired, and ultimately a strong consensus of opinion can be obtained. This results in greater buy-in to the family business by all concerned. The family journey of discovery sets the foundations for the future and is seen by many as more important than the written document itself.

Could a Management Buy-Out (‘MBO’) be right for you, your family and your business? Having built up a successful family business, you may now be thinking about succession and how to realise the value you have created. There are many routes to realising the company’s value, which usually is sale to a competitor. However, is a sale to a competitor the right approach for you and your business? To determine this, the question you should ask is ‘What do you want your personal, family and business future to look like?’ An alternative option to realising value is a MBO. A MBO is where the business is sold to the Management team, primarily funded through a combination of debt raised against the business, equity rollover and loan notes or preference shares. MBO’s enable shareholders to extract equity value and de-risk in a controlled manner and to pass ownership onto the next family generation or management team so they can continue to grow the business and generate future value. MBO’s are a fantastic option to protect the legacy of the business and the future of the workforce (essentially an ‘extended family’). MBO’s also help to incentivise the next tier of management; which may be the next generation within your family or your loyal staff that have helped to develop the business to where it is today (or both). Careful planning is required to ensure that the next tier management team have the drive and ability to take on additional responsibility and help the business to pay down potential debt raised as part of the MBO. With MBO’s, current shareholders don’t necessarily need to sell 100% of ownership, and in certain circumstances you could still be the largest individual shareholder, having the ability to say no to key future business decisions. This can help in phasing an exit plan for current shareholders whilst overseeing the next tier of management as they grow into their new roles. Are there any downsides? A sale to a competitor will typically generate a higher value for shareholders paid on day one. Although, if you see high growth in the future business under a new management team, an MBO can provide a much higher value to the family, but over a longer period. The level of cash paid to shareholders on day one through a MBO will be limited to the excess cash in the business and the level of debt that can be raised against the business. This needs to be fully appraised through detailed forward-looking financial projections to ensure the business doesn’t become over-geared, which may stifle future growth or put the business at risk. What if the next tier management or the next generation is not ready? Teams may need strengthening or may require additional guidance as they grow into their roles – in a lot of situations, shareholders are positively surprised. Careful tax planning is required for MBO’s to ensure they are structured in the most efficient way to benefit from the most effective tax rates, and practical advice around the impact on Inheritance Tax should also be sought. About the Author - Natalie is a Chartered Financial Planner and a Director of the Independent Financial Planning team at Mazars and is also the Head of the Family Business team. Having worked in financial services for over 18 years, Natalie has a wealth of experience helping individuals, families and business owners with all aspects of their financial planning, both UK based and Internationally.

Smith of Derby is a great British family business and has been putting Derby on the map for generations.This is a video outlining some of the family company’s core values and history and was filmed and edited by Nicholas Whitworth, a 6th Generation, Smith family member. It showcases the business, their pride and passion and the core values behind this award winning family business.

Smith of Derby scooped three awards at the Family Business of the Year Awards (‘FBOTY’) organised by Family Business United (‘FBU’), including the golden globe, Supreme Family Business of the Year 2020. FBU celebrates family owned businesses across the UK, recognising the contribution they make in terms of employment, income generation and wealth creation. In the ‘virtual’ awards ceremony held live online, Smith of Derby took the Manufacturing Family Business of the Year title which was promptly followed by the Midlands Family Business of the Year award and then the ultimate triumph, they were crowned Supreme Champions for 2020. For this Derby based company, in family ownership since its beginning in 1856, and now under the leadership of the fifth and sixth generation of the family, the evening was filled with emotion. Smith of Derby are true ambassadors for the family business sector and have really helped to put Derby on the map, celebrating their journey and even creating a film about their heritage . The film celebrates the life and times of this award-winning family company and is a fitting tribute to the their leader for many decades, Mr Nicholas Smith. As Bob Betts, Managing Director of Smith of Derby explains, “He was fondly known at the works as ‘Mr Nick,’ following the Midlands manufacturing tradition. Nick died just over two years ago, having served the family company since childhood, and these awards are a fitting recognition of all of his hard work in bringing the company safely into the 21st century.” Paul Andrews, Founder and CEO of FBU adds, “Smith of Derby are worthy winners of these awards and sit firmly at the top of the podium this year. As Supreme Champions they beat off some incredible competition to take the title, recognised for their values and ethos as a family business, commitment to manufacturing and their local community and have an incredible story to tell that weaves its way throughout the business.” Ben Fowler, Managing Director at Western Pension Solutions and one of the judges for the awards sums up why they are worthy winners, “Smith of Derby represent the true essence of an internationally successful family business. It feels almost as though they are the guardians of time itself whilst at the same time embodying a sense of timelessness. Committed to exceptional quality, craftsmanship and heritage, they take a long term view of their business and continue to invest heavily to prepare them for the years to come.” Natalie Wright, Head of Family Business at Mazars, a fellow judge and sponsor of the Manufacturing Family Business of the Year Award added that “this is a family business full of pride and passion for what they do. They are great British manufacturers and a fantastic ambassador for the family business sector too. Family is at the heart of what they do and they fully deserve all the accolades that winning these awards will bring them.” On winning the treble, Heather Whitworth, Mr Nick’s daughter and director of the family firm added: “This is such a special moment for the company. It is a fitting tribute to the whole team who have worked incredibly hard, not just in 2020 but over the decades. The team have worked tirelessly to maintain and develop the company,. and to continue to cherish our customers and win new friends across the world. These awards are accepted on behalf of the whole team who deserve all the recognition and our thanks.” As Paul concludes, “Smith of Derby are a fantastic business that have truly stood the test of time! They are innovative and entrepreneurial and continue to evolve, with an eye on the future, strong family values at their core and undertake work in the public realm that really does make places better.” “This business is all about beautiful, accurate clocks that are the heartbeat of the community and everyone involved at Smith of Derby have a role in keeping them ticking. Fantastic winners of these awards and it really does feel that they are the guardians of time for the nation.” “We look forward to the continuing journey of our incredible Supreme Champion Family Business of the Year, Smith of Derby,” he concludes.

Family businesses benefit by leveraging knowledgeable senior family leaders with innovative members of the next generation. Research shows that family business protégés — the incoming younger generation — report being most satisfied with mentors who were “still directly involved and active in their family companies rather than retired.” Those same protégés wanted a mentor who seemed invested and interested in their personal development. Mentoring is a critical issue for sustaining a multi-generational family business. Guidance has to be given to younger, less experienced workers. More importantly, the next generation of leaders needs to learn what it means to run a business, juggle employee personalities, and make difficult decisions. Fortunately, many family businesses already have the resources to solve this problem themselves. If a family business stays around long enough it is going to have seasoned members who become less active (on one hand), and it is going to have younger members who are more innovative and tech savvy (on the other). For senior members in particular, this mentor-protégé model creates a dignified process of passing the torch from one generation to the next. Leveraged the right way, these two groups can partner up to improve the chances that a family business survives for years to come. The Co-Mentoring Model Pairing an old industry veteran with an upcoming practitioner pre-dates modern businesses. Feudal systems relied on a master and apprentice to keep trade secrets alive over many generations. Today’s co-mentoring model improves on the traditional model, thanks to advances in the understanding of human psychology. Co-mentoring uses the gifts, talents, and understanding of both mentor and protégé. Instead of a rigid, hierarchical relationship between master and apprentice, each is co-mentor to the other. Seasoned family members stay active and can counsel the young about business practices and professionalism, as well as pitfalls to avoid. Younger family members receive crucial advice while bringing new ideas and innovative processes to their elders. Family And Tradition If you investigate successful family businesses, one recurring theme you’ll encounter is a sense of pride and understanding of family values. With the help of a co-mentoring process, older family members can impart that pride and understanding to the next generation. When McKinsey & Company published ‘The five attributes of enduring family businesses’, it noted that multi-generational businesses “make sure to permeate their ethos of ownership with a strong sense of purpose.” In other words, they deliberately build structures and processes to transmit important family values. Finding The Right Mentor And Protégé The most successful businesses tend to handle relationships more effectively. This is no secret. In this circumstance, that means pairing the right mentor(s) with the right protégé(s) to achieve the maximum results. Mentors don’t have to be family members per se. Neither do innovative protégés. But it tends to be the case that family members occupy both spots, especially for smaller or newer family businesses. Barbara Weitman, who has authored more than half a dozen books on small business planning, cautions against founding parents serving as direct mentors to their children. In her J.K. Lasser’s Finance & Tax for Your Family Business, Weitman writes that sometimes “mentoring is better left to non-family members” because young workers may take family instruction as criticism or judgment, even when it isn’t intended that way. This is sometimes true. Parents remain parents no matter the age of the children. But it’s also true that parents are biologically designed to help their children become more successful. What’s right for one family business isn’t necessarily right for another, and sometimes parents make the best mentors. It’s impossible to tell each family business which individual mentor best pairs with which younger family member, but I know the most successful businesses will tend to figure it out for themselves. Ripple Effects Perhaps the most significant by-product of a robust mentor-protégé system is better succession planning. We know that open communication is key to engaging the next generation, but it’s also key when it’s time to choose the next leader. A good mentor-protégé system encourages trust and honest dealings between generations, and Lord knows succession planning is easier when the kids get along better with Mom & Dad. Between 65 and 75 per cent of family-owned businesses fail or are sold before the second generation gets a chance to take over, depending on the country. No matter where you look, the failure rate reaches 90 per cent before a third generation takes over. Good mentoring is one more levee against that tidal wave of failure.

Finding a family successor is one of the greatest challenges for family firms but when done correctly, it will deliver value for the company over and above any other strategy. For all family firms there comes a point when the founder has to retire. The family has to then decide whether to keep the firm family-owned and family-managed. When there are strong assets (the unique contributions that only families can bring to the firms) underpinned by efficient governance structures, a family succession is the right path to take. But how to ensure the path ahead is clear for the chosen successor? My book “The Family Business Map” co-authored with Joseph P.H. Fan, identifies a number of challenges that families and businesses across the world face during a succession process. These include cultural issues, the transferral of family assets and competency. The first three are: The challenge of succession culture The challenge of transferring family assets The challenge of being competent When Culture Matters It would be unrealistic to believe that the culture of any given country doesn’t affect the succession planning of family firms. In fact, this is probably the strongest influence over the firm’s decisions in this process. A succession model which works successfully for, say, a 40-year-old US family business couldn’t easily be applied to a Chinese Confucian-based family firm in Malaysia where the sons would typically inherit the lion’s share. To take a very different example, consider the case of Chief Abiola of Nigeria, the country’s most influential entrepreneur since independence, who lost his entire business empire leaving his more than 40 children with nothing to inherit — in large part due to the lack of an established culture of transferring wealth from generation to generation in Nigeria. In contrast, in the Middle East, firms are to a large extent governed by Sharia law which dictates certain protocols that have to be respected and in Thailand and India, for example, children rarely go against their parents’ wishes. No one culture is easier than another and the families simply have to work around the cultural reality that the firm and the family live in. Transferring The Family Assets Powerful family assets are the pillars upholding family business strategies and it is their transfer from one generation to the next which lies behind the success of every family firm. Whether the assets are in the form of the firm’s heritage, powerful business networks or core values, the key is to find common ground between the generations. The assets are typically transferred through an apprenticeship model where the younger generation are exposed to the family firm from an early age and are taught everything about the firm over a long time frame. In addition to providing the younger generation with a strong platform from which to take over, this model also prepares the older generation to let go. This model works successfully for firms across the globe. The Mulliez family stands out in France’s business landscape for successfully transferring their values. The family’s business stable includes the retail distribution groups: Auchan, E. Leclerc, Decathlon, Flunch and Leroy Merlin,all grown from the founder’s textile manufacturing business, Phildar. In 2011, the family could count 780 direct descendants, 70 percent of whom belong to the family association which controls the business interests. Their family motto, “tous dans tout” (everyone in everything), reflects the core values of solidarity, family heritage and responsibility towards future generations. With a large pool of talent and a strong entrepreneurial spirit among family members, the Mulliez family is a role model for families in business around the world. While the apprenticeship model is successful at transferring family assets, it doesn’t prepare the younger generation particularly well for changes in the business and the economic environment, nor does it facilitate a change in business strategies. A particular challenge among Asian family firms is the third generation who went abroad to study and returned with a mix of old Asian and Western values. This is a recent phenomenon which is expected to become more prevalent given the globalised world we inhabit. The Measurable CV The succession decision will involve many questions for both the older generation and the younger generation alike. For cultures where it is expected that several members of the younger generation will take over the ownership and management of the family firm, answers should be sought to: How to choose between equally able children? Will they make good business leaders or will the company suffer under their leadership? Will the heirs collaborate in the future – do their personalities blend well – or descend into sibling rivalry? How do we nurture the competencies necessary to take the firm forward? And how shall we support others who wish to pursue a career outside the company? Family firms are typically founded by entrepreneurial creative people who build the company on hard work and experience, without necessarily having formal training. Thirty years down the line when the succession question arises, the company is no longer the same entity it was when it was founded. The workforce will have increased and new markets might start to look attractive. For that reason, it is valuable for the younger generation to gain experience outside the firm — whether this involves going to business school or having job, board or CEO experience elsewhere — which can then benefit the family business when they return later. The De Kuyper family succession process is one example of a very formalised approach to finding the right successor for the family business which I have written about in a previous article. My research has shown that a combination of the apprenticeship model and education/experience outside the family firm is the ideal path to take. Succession planning typically takes ten to thirty years to complete and is best done when communication is transparent and shared among family members so that everyone can envision the path ahead. For family firms with strong family assets and few roadblocks, a family succession is the surest road to success. Morten Bennedsen is the André and Rosalie Hoffmann Chaired Professor of Family Enterprise at INSEAD and Academic Director of the Wendel International Centre for Family Enterprise. He is a contributing faculty member to the INSEAD Corporate Governance Centre and is co-author of the book The Family Business Map: Assets and Roadblocks in Long-Term Planning (Palgrave Macmillan 2014). This article was first published on the INSEAD website and has been reproduced with permission.

Chinese family firms are a force for change in China, bringing a renewed interest in family entrepreneurship to the forefront. Notwithstanding the rapid changes taking place at the very core of Chinese family businesses, founders share five common challenges when it comes to succession. By reflecting on the simple principles below, owner-managers can advance the succession process in their firms without the disruption that often characterises poorly prepared transitions. Family-owned businesses that have survived the five great succession challenges have lived to be hundreds of years old, some more than a thousand years. They continue to thrive because they have ensured smooth successions from one generation to the next, as have the following examples of family-owned companies from around the world: Peugeot – The famous French automobile company was controlled and managed by the same family from 1810 to 2014, when they sold off its controlling share to a Chinese carmaker and the French state. Jardine Matheson – One of the original Hong Kong trading houses or Hongs, Jardine Matheson Holdings has been controlled by the Keswick family throughout its 185-year existence. Tata Group – Owned and managed by the Tata family since 1868, the conglomerate has contributed much to India’s transformation into one of the most dynamic emerging countries in the world. Ford Motor Company – One of the most recognisable names in the United States, the automaker dates back to 1903 when Henry Ford introduced mass manufacturing of cars. Chinese founders can learn many lessons from these tried and tested winners. To ensure their own longevity they should master the five challenges below. 1. Understanding The Culture Of Succession All successions are a product of the cultural norms that prevail in the particular country or region. Succession is shaped by the formal and informal rules of the specific environment in which families live and run their businesses. Influenced by Confucianism, Taoism and Buddhism, China’s culture transcends the individual, favouring collective or group initiatives instead. In this cultural setting, family members who are interested in joining the family business may not think their voice is being heard by the founders. If these key individuals are overlooked in favour of group recognition, the generational transfer of ownership and management of their family-run firms may not happen as planned. Hence, owner-managers should play a unifying role to prevent next gens from looking outside their family businesses for recognition. 2. Transferring Family Assets To The Next Generation Family assets are unique value-creating resources – they include the name, reputation, legacy, networks, cultural traditions and values of the family. While successful founders have proven that they can contribute assets to their firms, a key challenge is how to transfer these assets to the next generations and how to institutionalise entrepreneurial spirit. Owner-managers can act as role models, spending more time with next gens, taking them to business meetings, working out the governance structures, etc. Founders must find relevant knowledge-transfer measures if they want to maintain the momentum of the business in the transition to the next generation. 3. Developing Competent Children Today’s Chinese family businesses often have members of two or three generations working side-by-side on the shop floor. In this situation, founders face the challenge of overcoming educational differences. Next gens often want to develop their CVs, while elders are proud of their knowledge acquired from years of experience. While showing tolerance and respect, founders should not neglect higher educational opportunities for next gens, encouraging them to enrol in business schools abroad. They should also encourage next gens to obtain solid management experience outside the family firm. Having solid management skills and business experience, next gens will be in a better position to qualify for top roles in their family firms. 4. Communicating Across The Generation Gap In traditional Chinese culture, first-borns see themselves as junior in relation to their parents or elders, but senior in relation to younger siblings. This dual identity can inhibit personal and professional development if ideas from below are treated as less valuable than those from above. Fixed patterns can become etched in stone and resistance to change endemic. When Chinese families send their children overseas to be educated, the learning they bring back may be ‘lost in translation’. Hence tools for communication must be developed within the family and the firm to manage the expectations of heirs, while ensuring that the older generation does not lose face. This suggests a counter-intuitive style of communication that emphasises risk-taking where innovation and new ideas are fostered, and which reflects the entrepreneurial spirit that founders seek to pass on. 5. Engaging In Long-Term Planning For many founders and owner-managers there’s scarcely time enough in the day to look after their own short-term needs, much less the long-term needs of their heirs. Most will start planning for succession far too late in the game or not at all. But what if a founder suddenly comes face-to-face with a health shock? The family is then thrown into a succession crisis with no long-term planning to guide them. Research shows that only 22 percent of Chinese founders have succession plans in place. Without a plan, next gens lack the guidance they need to manage a successful transition. Founders who have not developed a plan for the future often look amateurish and unprofessional in the eyes of their next gens. Disillusioned by the confusing signals coming from above, heirs may pursue other career options available and often commit to alternatives outside the family business, leaving no successors to take over the firm. If founders respond to these five simple challenges of succession, the likelihood will be greatly increased that their families and firms will run smoothly for generations to come. By building a solid foundation upon which their firms will prosper and grow, they will bring longevity within reach. Morten Bennedsen is the André and Rosalie Hoffmann Chaired Professor of Family Enterprise at INSEAD and Academic Director of the Wendel International Centre for Family Enterprise. He is a contributing faculty member to the INSEAD Corporate Governance Centre and is co-author of the book The Family Business Map: Assets and Roadblocks in Long-Term Planning (Palgrave Macmillan 2014). This article was first published on the INSEAD website and has been reproduced with their permission.

A good insight into some of the challenges facing family firms and the family dynamics that promote smooth transfer to the next generation. Forty years ago, at the start of the great reforms in China that led to more openness and entrepreneurship, founders would have expected their children to start working on the shop floor and in the office from a very early age. But since the introduction of its one-child policy in 1979, there are far fewer children in business families today. Even though the government has phased out the one-child policy, introducing a two-child policy in 2015, many Chinese owner-managers may have only one child to succeed them in a family business. As a result, the second generation’s role is far more critical than to founders outside of China. Outside the mainland, owners of Asian family businesses have no qualms about raising a brood of children. Well-known names in the region have even gone to the extreme of fathering children with many wives. Casino king Stanley Ho is Macau’s wealthiest person and amongst the richest in Asia. He has 17 children, born to his four “wives”. In recent years, the 95-year-old ailing tycoon has handed control of his various businesses to several of his children. Not surprisingly, parts of the handover of the Ho family assets have hit legal roadblocks and messy lawsuits. Most founders on the mainland never have to worry about succession disputes like Ho’s because of China’s one-child policy. On the other hand, founders need to think far more carefully about long-term planning and how to teach their children the necessary skills to run a family business. The 'Sea Turtles' As an only child in China, especially one from the provinces, the son or daughter might have dreams of a future that could clash with the expectations of a founder. Why would they want to run a firm in the provinces when they could follow their vision of starting a career in Shanghai or Beijing or overseas? Traditional Chinese culture has adapted to the one-child policy by offering more choices for women. In the absence of a son, a founder may be more open to having a daughter take over the family business. In addition, founders often have more financial resources to provide greater educational opportunities to their single children. Following high school graduation, the only child may be rewarded with an all-expense-paid training programme abroad in a field of study related to the family business. China remains the world’s leading source of international students; more than 500,000 Chinese students went abroad to study in 2015, and most financed by their families. But upon their return, the sole heir has often surprised parents by not expressing an immediate desire to succeed them in the family business. Approximately half of returning Chinese students, termed “sea turtles”, have shown their desire to work in urban areas, such as Beijing, Shanghai, Guangzhou or Shenzhen. Nearly one-third of them have applied for jobs with multinational companies. Aware of the risk that their children may not return to their local business community after studying abroad, many founders have been pushing the Chinese government into developing higher educational institutions to rival the top tier schools abroad. However, if founders cultivate strong bonds of kinship among extended members of their families, their children would feel less pressure and would be more likely to return home to take over the family business. Grooming The Next Generation Next generation heirs in Chinese family firms are not free riders. Founders are often wise to educate their heirs in the allocation of family resources. By teaching their children how to pool their savings into a common family piggy bank, parents can make the difference between a unified and divided family. As founders move into their retirement years, the fruits of their hard labour will be reflected in their long-term planning. A clear set of succession guidelines will instil harmony, peace and order in the family household, giving rise to a prosperous business. Nevertheless, founders should fight against the tendency towards one-sidedness and blind conformity whereby family heirs miss out on valuable growth opportunities and innovative ideas. The single-child policy has left founders with fewer choices for family succession which may explain why so few families in China have undertaken succession planning. Despite these shortcomings, many founders have reserved their precious time and effort to educate and train the next generation to a high degree of professionalism. In so doing, they have given their heirs more incentives and the necessary skills to successfully take over the helm of the family and the business. This article was first published on the INSEAD website and has been reproduced here with their permission.

India has a rich and magnificent history of family businesses. The country’s rich history and culture have molded the edifice and character of family businesses over the years. Yashodhara Basuthakur and Dr Nupur Pavan Bang from the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business explain more. The joint family system was the backbone of these businesses and provided the required resources and capital for the cohesion and growth of the firms. In the early eighteenth century, India was predominantly an agrarian economy, with a deep-rooted caste-based social system that defined the occupational choices of the communities. Agriculture was the primary source of income and livelihood. The manufacturing industries were few and mostly in textiles, handicrafts. But India was lagging in the development of the economic, political, and commercial infrastructure essential for trade pursuits. The turn of the eighteenth century marked the transition from mercantile capitalism to industrial capitalism. The colonial rule led to the decline of the vibrant Indian merchant community. The Indian businesses faced discrimination in trade, policy and bank loans. During the Industrial Revolution in 1850, India became the supplier of raw materials and a market for the products of the British factories (cotton, iron and steel, chemicals, etc.). Some of the businessmen who emerged during this time were the Birlas, Kasturbhai Lalbhai, Walchands and the Tatas. They constantly criticised economic racism and created bodies of commerce and trade associations to lobby for the Indian companies. They invested in research and development and introduced new product lines. The Indian led business enterprises had expanded in scope and scale across the country by the end of the 1940’s when India gained Independence. The Indian family businesses also actively engaged in social causes and philanthropy through generous contributions to charitable trusts and other institutions driven by the cultural and religious traditions of “daan” (giving) as a sense of duty to the community. They played a pivotal role in institutional building by partaking philanthropic activities such as setting up premier educational institutes, research, and cultural centres for the progress of the country. The post-independence period marked with communal unrest was not very conducive for business. Additionally, the new Industrial Policy (1948) of free India was introduced which saw increased participation of the government in economic affairs. The large-scale nationalisation and government monopoly of critical industries such as utilities, transportation, iron and steel, heavy industries, armaments, atomic energy, manufacturing curbed the freedom of operations of the private enterprises. The Monopolies and Restrictive Trade Practices Act, 1969, put severe bottlenecks with respect to the quantities and types of goods or services that could be produced by the private sector. The firms now had to obtain licenses or permits to expand or start new businesses. Because of the limited licenses and capacity constraints, firms focused on diversifying into areas wherever they could acquire the required licenses instead of building on their core competencies. Some of the multi-generational business houses focused on restructuring by consolidation and expansion within the new framework by acquiring overseas companies and expatriate houses to enter new industries. Other business houses acquired a significant number of licenses to thwart competition and block other firms from entering the space. Also, there was a new genre of technology-savvy entrepreneurs who were well-educated with degrees from abroad and joined their family business or started new ventures. Some of the legacy business groups even lend their expertise in areas like engineering, iron and steel (Tatas) and shipping (Walchands) to the newly formed government enterprises. However, this period also witnessed some of the older business families already in their third generation going through splits due to waning family ties. The families had not yet adopted professionalisation, and the dominant family coalition still controlled the ownership and management. The economic liberalisation in 1991 was a landmark decision which opened the economy and introduced several macroeconomic and structural reforms. These reforms brought in a gamut of opportunities and challenges for the family businesses. While the businesses now had to compete with foreign multinationals and new entrepreneurial organisations for capital and resources, but they could now enter sectors which were earlier exclusively reserved for the public sector. The family firms were quick to restructure and respond to environmental changes. Some of the multi-generational businesses were able to weather the turn and came out triumphant in the new economy, while others who couldn’t sustain disappeared from the thriving business scenario. This era also witnessed the dawn of a new set of stand-alone first-generation family firms who harnessed the information-led economy by investing in research and technology. A study on Indian family firms by Bang, Ray and Ramachandran (2017) looks at the listed firms during the period from 1990 – 2015. The study categorises the firms based on ownership and management into two categories, namely family business group firms (FBGF) and stand-alone family firms (SFF) . According to the study, ninety-one percent of the listed firms are family-firms, which is a key driver of the Indian economy. In the year 2015, the top 30 family firms contributed to almost 50 percent of the total revenue of all listed family firms, which translated to 13 percent contribution to the GDP of India. Overall, listed family firms contributed to 26 percent of the GDP (Total Income). Out of the listed family firms, the FBGF’s contributed to 21 percent, and the SFF’s contributed 5 percent to the nation’s GDP. The family firms contributed to 28 percent of indirect taxes and 18 percent of direct corporate taxes collected by the government exchequer. The family-firms built more assets in the manufacturing sector, which has a long-standing impact across all industries. The SFF’s were predominantly in the services industry, owned and managed by the founder (or first-generation). The SFF’s played a critical role in the rapid development of the services sector and generated large-scale wealth and employment opportunities. During the post-liberalisation period, there was increased participation in equity markets by the family firms to meet the financing needs for expansion and growth. Among the listed family firms, the firms incorporated before the 1980’s were more likely to create business groups as a response to the macroeconomic conditions. The average age of the listed FBGF’s in the sample is 38.44 years, whereas that of SFF’s is 28.73 years. The family firms have displayed resilience, character, and adaptability over their long history and played a pivotal role in India’s growth story. However, with the current shifts in the economy and society, there are major challenges that family businesses must surmount. The family firms at the crossroads of succession have to take the decision on either to transition to next-generation or professionalise by inducting non-family managers. The family firms have to adhere to stricter and transparent corporate governance guidelines, better leadership and connect with the community to continue to chart the success story in years to come and ensure the perpetuity of the business and family. The authors are Yashodhara Basuthakur and Dr Nupur Pavan Bangfrom the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.

When we talk about the good practices of managing a family business, we refer to the layers of experience that have accumulated over the years and that are constantly presented as effective habits in managing relationships, making decisions and change strategy. From these practices, here are ten that we have had the privilege to learn from our clients and that we consider guarantee to a great extent of a high level of satisfaction in a business family: 1. Separate The Concepts Of Ownership, Governance And Management The family must clearly establish these differences, since they facilitate a better understanding of the management of power. The owners have a series of rights and obligations inherent to the ownership of the shares as their owners. The government sets the company’s strategy, for which we recommend that its managers have a broad knowledge of the company and the sector, as well as minimal financial and accounting knowledge, so that their contribution is positive and valuable. Finally, the managers’ obligations have to do with the execution of the major decision lines set by the government. As long as the family is clear about this separation of roles, a professional management of the company that meets the demands of the responsibilities of the mentioned functions can be better understood. 2. Create Governance Structures In Accordance With Its Complexity Implement a Family Management System that, based on the adequately empowered forum for decision-making (for example, the Family Council or the Board of Directors), planning activities to achieve real and measurable objectives (such as a Work Agenda), rules adapted and adaptable to the circumstances (an effective Family Protocol), based on a clear and defined north (the Shared Dream), can work based on conversations about a strategic plan that the family has designed and follows up on constantly. However, the design of these structures must obey to a reality commensurate with the complexity of the company-family-property system: too much structure can bureaucratise decisions, little structure reveals a lack of order. 3. Transparent Management And Continuous Accountability Trust between adults is based on the transparency of the information that is exchanged. Adults can be the partners of a family business that are not linked in a parent-child relationship, which has another, a more natural and deeper concept of trust. Transparency is based on consistent account performance. But an accounting performance is effective if the person who receives the information (which is usually basically financial, as it is the language of the partners), knows how to interpret them correctly. To interpret them correctly, you must have a minimum knowledge, which is had or is acquired. In summary: if we want to generate trust, we must know. 4. Generate The Concept Of Stewardship The idea reflects the need to preserve great value, the family name as a brand, its reputation. It is not just about money since equity, as patient capital, allows you to invest with a much longer time frame. It is thinking of different cycles. They are not years. They are generations. The families that succeed in transcending generational change are those who understand that what they inherit is not a gift from their parents, but rather a loan made by their children. 5. Improve Communication, Cultivate Dialogue And Tolerate Differences One of the main objectives when working with business families is to help create circumstances that allow effective communication between the interlocutors, who throughout their daily interaction are constantly discussing, analysing and proposing the different scenarios to face the future of the heritage they share. But be careful: this is only possible if we accept and tolerate differences, not only in basic terms of the message but also in communication styles, recognising and respecting the preferences of each one, for which a better knowledge of all members is required by everyone in the family group. Fortunately, this is a practice that can be learned and improved. 6. Keep On Continuous Training (shareholders, directors and next generation) We must constantly prepare ourselves to face the challenges inherent in their nature: find capital to grow without weakening family control, resolve the difficulties associated with generational change, anticipate the demands and challenges of the processes of economic change. Being able to guarantee control in these and other circumstances, maintaining order and ensuring the stability of the business, depends to a great extent on the constant training of directors, company managers, current shareholders and members of the next generation of leaders and owners. If you think that knowledge is not important, do this mental exercise: disconnect from the business environment and try catching up before lunch six months later, where you will attend with all the leaders of your competition. 7. Accept That Conflict Will Always Be Present As the family enterprise evolves and becomes more complex, conflicts within the family are inevitable. In fact, conflicts are necessary to be able to break with inertia and adapt to new circumstances that arise from changes in the environment, or as a consequence of the natural evolution of the family or the business. Therefore, we must understand that crises in business families are not necessarily negative: depending on multiple factors and how we re-qualify and manage the situation, a conflict can lead us to a healthy and necessary solution to a motionless situation that cries out to face change. 8. Trust The Judgement Of External Advisers Although it depends on each case, in general a Board of Directors must be made up of representatives of the shareholders, representatives of the managers and, in addition, some external professional who adds value to the company. They must be trustworthy people, with business experience in the sector, with recognised and valuable prestige and criteria, but above all, truly independent. They provide the family business government with a fresh and objective vision, help to professionalise the decision-making process, and thus, prevent family conflicts from affecting the proper functioning of important decision-making centres. 9. Accept The Definition Of ‘Institutional Retirement’ The guarantees of effective transfer of the management of a family-owned business will require (beyond the role of the family, environmental factors or the planning and preparation of successors), enthusiasm, capacity and responsibility. But above all, will require a bond of trust and commitment to solve things together between successors and the leaders in charge. We are not looking to replace the personality that once played a role, as that is simply impossible. The key is to understand that it is the substitution of the functions of the position and not of the person himself: it is the institution in command that requires a new person in charge who meets the previously defined objectives of the position. 10. Draw Up A Family Protocol Based On The ‘Shared Dream’ Many times, in the path of the evolution of a business family, the owning family is sooner or later with the necessity to write a Family Protocol. It is usually presented as an excellent opportunity to develop a set of rules that regulate their relationship with the company or the main economic activity. If the drafting project is completed, the owner family will have in their hands a manual for the strategic managing of their assets, which will allow them, among other things, to carry out the transition of the business to the hands of the next generation. But in our experience, these “user manuals” are only sustainable over time when they base their manufacturing process on the methodology of a Shared Dream, in which all individuals find the common place where they can bet as one for the future they want. The implementation of these recommendations in a family business is neither simple nor free of obstacles, but the goals set can be achieved as long as two conditions are met: First, all agreements must be consistent with the future projection (which it is known as the ‘Shared Dream’). And, secondly, all decisions in a Family Council must be based on the concept of “consensus” which, unlike ‘unanimity,’ fuels debate and increases the group commitment.

More than four decades ago, Billy “Mack” Jameson (a real character with a fictitious name), founded a modest grocery store in San Diego, CA. Over the years, his tireless effort, the unconditional support of his wife Martha and his business eye for real opportunities, turned his initial venture into a solid retail organisation, constantly diversifying it services and growing as a leading business. Ten years ago, after the founder’s death, his three sons Jamie, Linda and Bobby, took over the set of operational assets that today directly employs more than two thousand five hundred people throughout the state of California. However, the Jameson siblings decided from the beginning to impress a differentiating feature on the family’s relationship with the company: they did not want to make their father’s mistake by spending so much time with the company and neglecting their family, so they decided that their children would not “be contaminated by the vice of constantly talking about work”, and they agreed not to talk about the company at home, leaving the next generation to enjoy without worries the benefits and privileges that belong to a wealthy family with a good social position. A few months ago, after a surprise heart attack from which he is successfully recovering, Jamie, the older brother, begun to seriously talk to his sister about the succession to the third generation. However, none of the founder’s five grandchildren (now in their mid-twenties), has so far had the greatest interest in the business. In fact, they have done little in their professional lives. They were neither motivated to finish their studies nor assume responsibilities in any job (it is forbidden to work in the family business, according to the rules imposed by the founder’s children). After all, the grandchildren think that “thanks to their charismatic and successful grandparents, they have their parents’ wealth that will support them in the future.” Jamie realised this cruel but true reality of his family and commented to his sister: – “We have to talk about the family business with our ‘children’ … but where do we start?”- To what she replied: – “We should start by ourselves. First thing’s first…” This is a real-life case that shows the reality of some families I have had the opportunity to work as a family business consultant. The lack of communication between family members is often the main cause of the conflicts they face. Attempts to create moments of coherent conversation about shared heritage often end in heated discussions between sibling partners, who have different perspectives of the same reality. One of the main goals when working with families in business is to help to create minimum conditions that allow effective communication between the owners, who must discuss, analyse and propose the different scenarios to face the future of the legacy they’ve been sharing. The initial conversation should then determine if the family truly wishes to remain united around this heritage with a defined purpose. Implementing these processes is neither simple nor free from obstacles, but the degree of satisfaction can be increased as long as two conditions are met: First, all agreements must be consistent with the purpose of the legacy and the future projection of the family (known as the “shared dream”). Second, all decisions in a Family Council must be based on the concept of “consensus” which, unlike “unanimity”, fuels debate and increases the group commitment. At certain point, families must face the question: “When is the next generation going to participate in this process?”. The answer is always “When the generation in charge is ready.” It is not possible to create a programme that prepares future owners if the current leaders are not clear about the intentions and rules of engagement for the next generation. Cousin problems (third generation) are usually due to relationship problems among their parents (second generation). The best way to achieve a second-generation preparation plan is to have a fully functional Family Council consistent with its members’ decisions. Through their Family Council, the Jameson siblings found a way for having a forum that allowed them to strengthen the role of their Family Office and Board of Directors, focusing on their responsibilities as owners and building a more efficient wealth strategy. But all this was only possible through the creation of a space exclusively dedicated to the conversation of family and legacy issues, based on effective communication and mutual respect and recognition, with the awareness that the leadership inherited from their father was now divided among the three siblings. And precisely, thanks to the leadership of the Family Council, in a couple of years a special educational programme was designed and implemented with external and in-house resources, focused on the motivations, skills, attitudes and knowledge needed for the third generation to be responsible future owners of Mack and Martha legacy.