Family enterprises: sustaining private capital across successive generations

Tips for sustaining the family enterprise

Below, we highlight some of the key ways families can set their enterprise up for success over the long term:

1. Align on and renew your family mission

There needs to be a compelling purpose to keep the family’s business interests together, and the family must align with that purpose and renew it from one generation to the next. If there is no agreed-upon family mission, it may as well be merely common investments, and the enterprise may not have a sufficiently coherent thesis or model to keep family members from parting ways.

2. Plan for the transition of control

The way a family exercises control over the enterprise is often different from the division of equity interests among family members. There is no one-size-fits-all for family governance, and families should take the time to consider and design a control structure that is customized to their circumstances. What may have worked for one generation may not work for the next. For example, while resting control in the hands of the founder/entrepreneur of the enterprise (G1) is logical, will passing control to one of several G2s continue to make sense and, even if logical, will it be respected by others? Should a group of family members make decisions together and, if so, who should be in that group and how should those decisions be made (e.g., by consensus or a vote)? Should non-family member independents play a role, either in an advisory capacity or as decision-makers? There are many iterations that could be considered. The process of designing or refining governance may include engaging in tough conversations amongst family members but understanding, respect and buy-in are key to ensuring a control structure’s ability to survive. Clear control mechanisms subject to checks and balances are typically preferable when longevity is the goal.

3. Open and transparent communication with good information flow

Insufficient transparency in governance and decision-making, and limited information flow, breed suspicion. Transparency and information sharing cultivate trust and should be the rule, not the exception. Family members in leadership positions (including G1) should work to prevent conflicts before they start and be clear about long-term intentions. Even in structures where control rests with a single person, information sharing and consultation with other family members is key to generating support and avoiding conflict. Don’t avoid conflict by being evasive, or acquiescing by telling family members what they want to hear in the short term.

4. Stay on top of tax planning

Taxes cannot be deferred forever. Either the family ownership structure should plan to fund the taxes, or it should ensure that family members are planning to fund the taxes themselves. Absent planning, ultimately the family ownership structure will be responsible because tax liabilities will encumber ownership interests. Unplanned tax liabilities can create pressure to liquidate assets at inopportune times, including the family enterprise itself, and can lead to substantial familial conflict.

Torys has a long history of working closely with high-net-worth families, advising them on their business, financial, personal matters and beyond. Learn more about what our Family Enterprises practice can do for you.