Understanding the Family-Business

PHILIP J. FOGARTY

Partner and GTA Audit Innovation Leader

KPMG

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On the surface, family businesses share numerous traits with their non-familial peers. Dig deeper, however, and they are an entirely different breed. Priorities differ, issues of governance and succession can be more complex, and long-term goals are often as much about such items as protecting legacies as they are about serving the bottom line.

Then there are the complexities posed by family dynamics when mixing family and business. We’ve all heard the saying from “clogs to clogs in three generations,” in fact, there is research which suggests that 70% of family businesses won’t survive the second generation, while 90% won’t make it past the third. The reasons for failure vary, but more often than not, they are in some part the result of an inability to find harmony between the often competing priorities in the so-called “three-circle” model that is, “Family”, “Business”, and “Ownership”. The following are only some of the common issues which can unsettle the scales:

• DEFINING WHO IS “FAMILY”: Many family businesses are challenged to answer the “who is family” question as it relates to issues of Ownership, Governance, and Succession. Should ownership be restricted to “blood line relatives”, and are spouses and common law partners considered “family”. How do we view issues of same sex unions, adopted children or even divorced family members?

• OUTDATED GOVERNANCE: Family businesses employ a variety of natural or informal governance structures, many of which attempt to maintain harmony between the Family, Business, and Ownership (aka the “three-circle” model). This natural or informal approach to governance may keep the business and family on course in the near term, but can buckle under the pressure of competing priorities, generational values, and business realities.

• LACK OF SHARED PURPOSE: In all organizations, not just the family business, it is critical to success

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that there is a clear vision, goals and objectives so that everyone in the organization and family is pulling in the same direction. The Shared Purpose of a family business is a voluntary commitment to be in business together. In the case of a family business, there can many other objectives and goals which are non-financial (socio-emotional) such as protecting the family legacy or reputation and philanthropy, to name a few.

• RESISTANCE TO CHANGE: “We’ve always done it this way” is a mantra that may fly in the home, however, business success depends on growth and adaptation, but family businesses can find themselves torn between honoring traditions and outdated ideologies that clash against the realities of the modern business and the conflicting vision of the next generation.

Overcoming these hurdles is difficult, but doable, and there is proof of that fact. Family businesses account for nearly half of private-sector employment and 48.9% of private sector GDP in Canada.

Indeed, there are no clear cut solutions for every family however, given the demographic trends and the looming succession of many family businesses, the data gaps in the understanding of this important part of the economy are worrying. It is important for the advisory community to invest in understanding this space to help ensure the future success of such an important sector of the Canadian economy.

We’ve barely scratched the surface of thought leadership in the family business space - look for a more indepth discussion on specific topics of family business governance and other key issues in future articles. 