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Managing Your Maturing Family-Owned Business

When your family has poured countless time and energy – perhaps over the span of generations – into building a successful business, you likely view your private venture as much more than a source of income. Your family may even find it difficult to trust outsiders to help run the business or to assist with important management decisions. However, there comes a time in the lifecycle of most family businesses when hiring additional non-family personnel becomes necessary to ensure continued growth and profitability. Integrating outside managers into the family-owned enterprise can be a complicated step. A common mistake family business owners make during this process is failing to properly distinguish between the roles of ownership and management.

Avoid Confusion and Conflict

Second-guessing or micro-managing undermines your management staff and disrupts their relationships with the employees. Consider a scenario in which an owner periodically attempts to instruct employees or managers on how to perform daily tasks. Although the right to partake in day-to-day decisions that impact the business may seem like an owner’s natural entitlement, it can often be counter-productive. A good analogy is to look at families where the parents contradict each other when making decisions for their children. The child quickly learns who has the final say and becomes indifferent to instructions from the other parent.

Owners are financially, and often emotionally, invested in their business, but the people they hire to manage it are the ones responsible for running the business day in and day out. It’s up to the owner to hire the most qualified management staff, provide them with the firm’s long-term vision, and then empower them with the autonomy to perform the task at hand. When these respective roles are not clearly understood and adhered to by all parties, confusion and conflict can arise.

Unfortunately, separating the roles of ownership and management is not always a perfectly cut and dry solution. After all, it is not uncommon for a business owner to serve in a formal management role. But even then it is important to distinguish one set of duties from the other.

Introducing Outside Workers

You may feel compelled to keep family members in key positions within your business even when they fail to meet performance standards. But as a business owner and manager your goal is to make decisions that maximize efficiency and profitability. It’s not hard to see how these two different sets of obligations could potentially produce conflicts of interest. Often, it can be difficult to maintain an appropriate balance.

You may come to recognize that you are simply too emotionally involved in the business to manage it without bias. In this case, the wisest decision is to hire a manager who will be able to approach certain situations more objectively. Eventually, as your business continues to grow, you may even find it appropriate to appoint an executive board of directors to oversee the broader operations and long-term goals of the firm.

Instituting a more formal organizational structure may feel unnatural at first for the traditionally family-run venture. But a formal process can be the key to the survival of your business as it matures. Remember that the financial security of your family – particularly the younger generations – may depend on the long-term strength and stability of your business. Continued growth and profitability of your business are in everyone’s best interests.

When you are reviewing how your options, don’t forget to regard as potential collateral any money you may have invested in your whole life or universal life insurance policies. The amount you may borrow is determined by how much equity you have built up. If you have accrued a significant cash value in a life insurance policy that, too, is an asset you may decide to borrow against. The older the policy the better your goal of obtaining the lowest interest rate possible.

A standard collateral assignment is common practice in most provinces. Upon death, the life insurance company pays the claim to the creditor and any excess is given to the beneficiary. This is the most common way to borrow against your life insurance and when implemented correctly there are no adverse legal or tax consequences at the time of assignment or after the repayment of the loan. Independent legal advice is essential when you are considering using your life insurance as collateral since there can be legal and tax concerns if the contract is not structured correctly.

Home Equity

Another option worth considering is setting up a home equity line of credit. This may be a good source for homeowners who have built up significant equity, but use it with caution. You risk losing your home if your business fails.

 

Please contact me for further information or research.

April M. Dorey, B.Comm, FMA, FCSI
T: 250.405.2429 or 1.877.405.2400
april.dorey@raymondjames.ca
www.aprildorey.com

 

*Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. You should discuss any tax or legal matters with the appropriate professional. Written by April Dorey and expresses the opinions of the author and not necessarily those of Raymond James Ltd. Statistics and factual data and other information in this newsletter are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. Securities-related products and services are offered through Raymond James Ltd., member CIPF. Financial planning and insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member CIPF.

© April Dorey. Articles, statistics and other data referred to or cited are intended to provide readers with potentially useful information for their own personal use. *Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. You should discuss any tax or legal matters with the appropriate professional. Reproduction without permission is permitted with due acknowledgement. The views expressed are those of the author, April M. Dorey, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. The information contained in this article was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

 

For more information please contact:

April Dorey, B.Comm, FMA, FCSI
Financial Advisor
Raymond James
10th Floor, 1175 Douglas Street
Victoria, BC.
Tel. 250-405-2429
www.aprildorey.com

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