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Can You Guess My Preference?

This week we’re looking at a topic that comes up often in my work, but isn’t necessarily spoken about front and center.

It’s usually right below the surface, though, and it speaks to one of my mantras, or at least one that I’m beginning to flex more often.

I recently spent a day with several members of a business family I’ve been working with for a while now, and because a significant part of our meeting was educational in nature, I ended up repeating it a few times.

In fact, because I heard myself saying it over and over in different (but related) contexts, it also rose to top of mind potential blog status.

Family Business Governance 101

The morning began with some basics around family business and the governance systems they need, and the way that governance typically evolves as they mature and grow, especially as the families prepare to transition things to the next generation.

I went over the Three Circle Model (Tagiuri and Davis) and the Four Room Model (Lachenaeur and Baron), and shared my definition of what governance boils down to. See: Succession Without Governance Equals Chaos

And as I talked about the changes and transitions that occur in each of the three circles, as well as in other areas, I kept coming back to the speed of the transitions, and how long they can be expected to take.

Gradual changes are almost always better than sudden changes”, I stated, probably 4 or 5 times during the day.

At one point I actually added, “I just figured out my blog topic for this weekend”.

Family Changes Are Typically Gradual

If we think about changes and how they happen in the family circle, they are usually pretty gradual in nature.

When there’s an addition to the family, it usually comes after 9 months of pregnancy or some period of engagement before a wedding.

Exits from the family can be more sudden, as some people die unexpectedly or get separated without much warning.

But this just goes to emphasize my point that the gradual transitions are easier to take, because people have a chance to accept and prepare for what’s coming.

The suddenness of an accidental death or of a marriage breakdown are part of what makes them so jarring.

Business Circle Changes Vary

When we think about the business circle and how changes happen there, it’s kind of a mixed bag.

Building an extension to your plant takes months or years of planning, but firing someone can happen more quickly.

Again, though, when things happen in a sudden fashion, the waves that are made are more troublesome than when people have had a chance to adjust and prepare for the new reality.

Entering a new market takes months of planning and can be exciting for employees to get behind, but making a decision to close something down is usually quicker and can be quite demoralizing.

The good things proceed slowly, the bad ones quickly.

Ownership Changes at Glacial Speed

We’ve now arrived at the last circle, which gets the least attention. See Ownership: The Forgotten Circle in Family Business. There are good reasons why this circle moves the slowest.

Whereas the governance of the family is usually very informal, and the governance of the business is likely “semi-formal”, the ownership is usually governed by s shareholders’ agreement, which is typically very formal.

Changing a shareholders’ agreement normally requires all of the current shareholders to agree on the new one.

And because looking at updating an agreement only usually occurs after many years, the new circumstances will usually be quite different, meaning that the likelihood of everyone agreeing again has decreased.

Build in Some Flexibility

My view, which only came to me in the days following that meeting, is that the key is to revise the shareholders’ agreement very infrequently, BUT to make sure that there’s plenty of flexibility built into it.

You can determine share classes and their various attributes in a durable way, all the while allowing various people’s percentage of ownership to change as needed. See The Two Most Essential Components of FamBiz Ownership.

Gradual ownership transition, from one generation to the next, makes a lot of sense.

If you create an agreement that allows for that to happen in a relatively simple fashion, without requiring the reworking of the whole agreement, you’ll be way ahead.

Never forget: sudden changes don’t work as well as gradual ones.