Managing Risk in the Family Business

Business families often need help to address the non-financial areas of risk in addition to the financial ones.

Managing risk in the business family context. When I see the words ‘risk management’, I’m sure things like insurance, tax planning and a well-diversified investment portfolio are some of the first things that come to mind for you. Of course, these things are critical for preserving and protecting a family’s wealth, and we do give a great deal of attention to them in our work with clients. 

But there’s a lot more to managing risk in a business family context than these financial items alone. Let me give you a few examples. Possibly one of the best risk management tools you could use is a common understanding or shared vision of the future. Now, it may be that you are at a point in your business and family journey where everyone is ready to nail down a concrete plan. Or maybe you’re at a point where you can only paint a picture and offer alternatives for people to consider. Either way, the more clarity you can provide; the better.

The more definition you can have around things like:

1. Who will have what roles?
2. How will these roles transition over time?
3. How will decisions be made and what are the financial implications for everyone?

The more things you can give people to hang their hat on, the more confidence, acceptance and optimism there will be about the future and the less confusion and risk there will be when things change, especially if it is imposed on you suddenly. In a more concrete sense, written documents and legal agreements can provide instruction and confidence. These can include shareholders agreements, wills and policies to govern interactions between family ownership and business, and to address things like terms for employment and compensation, criteria to qualify for taking key management roles or even becoming a shareholder. 

However, give your full attention to the development of these important documents and policies.  Developed well, they can become enormously helpful. Developed poorly, they can lead to considerable loss and frustration. Along these lines, developing the ability to communicate effectively as individuals and as a group is another great tool for managing risk.

Sometimes there can be anxiety about communicating openly with each other. This can be due to negative experiences in the past, and uncertainty about what to do or a tendency to imagine the worst outcomes. At times even your closest family members can think and act quite differently than you expect. And it’s good to discover these things before trying to move forward with plans. In general, working to improve the health of your family and working relationships can be one of your greatest risk management tools, as unfortunately, the destructive forces of negative conflict between family members can have a devastating effect on your net worth and business future.

I know it can be tough for business families to find time, but all of you will benefit from spending quality time together outside of work. Holding intentional events for learning, planning and fun teambuilding can really improve how things go at home and on the job site.

Some other things you can do:

1. Help the next generation prepare for future roles in the business and wealth by teaching them sound financial principles and work ethic.
2. Provide them with career paths counseling to support advancement into roles they will enjoy and are most likely to succeed in.
3. Develop a strategic plan and budgets to help everyone understand targets and be on task.
4. Implement healthy performance management and team building processes for employees.
5. Clarify your organizational structure and then begin raising up leaders, reducing its dependency on you or other long-term employees. 

A business’s value is very connected to its level of dependency on a current owner Ultimately, anything you do to strengthen your business and make it sustainable will make it easier for the next generation to succeed or for a third party to pay you a good price. Business families often need help to address the non-financial areas of risk in addition to the financial ones, but the benefits of doing so are significant.

So, if you are a business owner, especially one with family members involved, and you’re concerned about the risks you may be facing today or in the future, feel free to connect with me at jeff@covenant.ca to discuss your situation. I’m certain I can help you.