The 7 Complexities Entrepreneurs Face in Building a Multi-Generational Business

By George E. Dube

Many investors we speak with are looking to create a multi-generational business. To achieve this, a plan with the end in mind to accommodate a scalable investment portfolio can save significant tax headaches.

I’m generally working a few clients who are actively transitioning their real estate business to the next generation, and several hundred who are methodically building their empires for family, or charities, for example. Now, as part of BDO Canada LLP, I am also able to use some of their business transition ideas (including this article), and adapt them for real estate investors.

As a family business grows, whether you are making widgets, providing services, or building your real estate portfolio, so does the need to professionalize. In the early years, you don’t need much formality in the business. Generally speaking decision-making, ownership, and power is in the hands of one or two, and the organizational structure is simple. Input from co-venturers may be minimal and frequently undesired. However, growth requires change and change increases the complexity.

While recognizing that a strong family unit contributes to the success and continuity of the business, family enterprises, such as real estate investing, struggle to effectively balance the priorities of both business and family. The good news is that by bringing some formality and structure to the system, you can manage these complexities. Even if the next generation is still in diapers, beginning the process now for your family and/or your co-venturer’s family can pay large dividends.

Addressing these complexities throughout your business life will greatly enhance the likelihood of arriving safely at your preferred destination, instead of having to go through the painful process of your business venture failing and having to experience company insolvency. Although this may still happen without the complexities, it is better to smooth them out so there can be a successful transition of ownership and leadership with the family relationships still intact!

The 7 Complexities

1. No clear definition between family and business

With the principles and values of the family at its core, the DNA of a family company is considerably different from that of a non-family business. A non-family business can rigorously apply a “bottom line” policy in all its operations, strategic planning and decision-making processes. The family business, on the other hand, often has definite socio-economic goals and will base decisions on what is believed to be in the best interests of the family, tenants, investors, and suppliers who depend on it for their lifestyle. This blending of family and business causes a myriad of issues.

2. Family members can lose their personal identity

While a family working together for a common goal can be an extremely powerful force, it is very easy for succeeding generation family members to feel they exist only as a cog in the proverbial wheel. In some families, children feel it is their duty to join the family business while others do so for the privileges that the business can bestow. But differences in work styles, motivation and personal needs are often poorly understood. Throw in the families of co-venturers as well, and you can see why this mix can be very powerful, or just the opposite.

3. Unresolved Conflict

Time and again, unresolved conflict between individual family members has resulted in litigation, with help from someone like the Frederick business attorney groups, which whilst helpful to resolve the situation has sadly destroyed not only the business but also family relationships. You shouldn’t avoid conflict but rather address it in a positive and productive manner to find the best possible solution to the issues. Families need to be more conscious of managing differing expectations and perceptions while being proactive in finding a common interest and ways to create positive conflict.

4. No clear vision or direction – only dreams

As the business grows, responsibility must go hand-in-hand with the privilege of being the Owner/Operator. Business decisions impact both family members and co-venturers directly and also affect the community at large, so it is important that your business has a clear, unified direction. Statistics show that most business owners fail to identify a clear path forward, preferring a more “gut feel” approach to making decisions. This leaves other stakeholders with a feeling of uncertainty about the business and an increased likelihood that your team will be unable to anticipate the challenges ahead.

5. Lack of trust or “we focus”

Trust means to depend or rely on others and is a fundamental requirement of a successful business and its inevitable transition. Within a family enterprise, trust is developed from a “we focus” or common interest around the philosophy and direction of the business. In families whose social capital has a strong foundation of trust, members are confident that individual intentions are aligned with the best interest of the family unit. Without trust, the “what’s in it for me” disorder spreads quickly.

6. Lack of communication

While it might seem obvious that a lack of communication will cause complexity in any business, most family businesses tend to communicate on a perceived “need-to-know” basis. This complexity stems from the early stages of the business when the decision-making team was small and there was little need for regular or formal communication. Unfortunately, poor communication leads to many of the stresses that manifest themselves as negative conflict. When asked, business owners who have previously transitioned their business felt that 80% of the process required effective communication. Also, the majority of failed wealth transitions in North America have been attributed to a lack of communication.

7. Lack of clarity around roles, responsibilities and rights

Few family businesses manage the division of roles and responsibilities from a purely business perspective. Many businesses were created as an outlet for a specific skill set or talent of the founder who later finds him or herself struggling with tasks that conflict with their natural strengths. In addition, privilege or entitlement often leads to unqualified offspring in key positions and sometimes roles are even created for a specific family member. Failure to professionalize the distribution of roles and responsibilities breeds a false perception of rights, role confusion and greater conflict.

So, as a family business owner or member, what can you do to address these complexities? The first step is to recognize the issues facing your own business. Correspondingly, for help identifying these issues, and what can be done to combat them, you might find it helpful to reach out to a team of family business consulting specialists. Above all, while your business may be small right now, your family, and your co-venturer’s/shareholder’s family, will greatly benefit from the steps you take today.

It’s never too early to plan for the end and the many steps and generations in between! In creating your JV, shareholder, or partnership agreements think about the future and plan your structure and business accordingly.

George E. Dube, CPA, CA is a veteran real estate investor and accountant. He has spoken, written various articles, and co-authored two books on real estate accounting. Reach George at: gdube@bdo.ca or @georgeEdube.

{{cta(‘5510749d-c854-4e57-a2b1-ca60ac46ede8’)}}