Jewellery Business is excited to introduce ‘Behind the Counter,’ a new column exploring business-related issues impacting Canada’s independent jewellery retailers. At the helm is long-time contributor Danielle Walsh, a family business advisor, educator, and chartered professional accountant (CPA).
A recent study indicated the main concern of 51 per cent of family business owners is that the next generation is not sufficiently prepared to take the reins. While ‘grooming’ future owners and ensuring they have the proper education and experience plays an integral part in this process, one should not ignore the impact of professionalizing the business. This helps all parties involved feel more comfortable about the transition of power and can work wonders in ensuring the readiness of the next generation.
As family businesses evolve from their beginnings where the driving force was (in many cases) primarily entrepreneurial, there are several areas that are often overlooked, including:
- formal preparation (i.e. business, strategic, and succession planning);
- established internal structures (i.e. job descriptions, pay scales, performance reviews, employee discipline, and organizational charts); and
- communication (i.e. regularly scheduled meetings for management/shareholders, as well as transparency of information).
Indeed, for many first-generation business owners, success largely stems from their entrepreneurial spirit and their passion for the industry they serve. As a business grows and becomes more complex, however, it must incorporate ‘best practices’ into its day-to-day operations. Further, research on family business indicates incoming generations need and want more structure. In short, the family business needs to ‘professionalize’ as it migrates from generation to generation.
While it is a significant task, professionalizing is also among the most important activities a family business undertakes as it moves forward and prepares for the future. While the process involves a lot of time, effort, and allocation of resources, it is worth persevering to get it done.
What is involved?
Professionalizing entails implementing clear structures, policies, and procedures that all employees (family and non-family) must consistently follow. It plays an important role in minimizing conflict amongst the next generation and ensuring the business continues to run smoothly.
When an independent business begins, its founders frequently take on many tasks, often overseeing human resources, finance, sales, product development, and so on. From inception, these entrepreneurs make every decision and are involved in all aspects of the operation. They are also the keepers of crucial information. As a business grows and the next generation joins, this model is no longer feasible.
Consider, for instance, the following example.
When I ask a founder-owner of a jewellery business how they determine the price of a custom piece, they often say something akin to, “With my 30 years of experience, I just know what to charge.”
While this method works fine for them, how are members of the next generation (who, perhaps, have five years of experience) expected to know what to charge? Worse, what happens if the business owner becomes incapacitated and is no longer able to work? How would custom pieces get priced? How are other employees supposed to learn how to do this? Think of all the experience now lost.
Many business owners seem to believe the next generation will absorb this knowledge naturally (as if through osmosis); however, this is not the case, and often proves to be a major stumbling block.
If we take the time to put to paper a methodology to determine custom pricing that is based on a business owner’s decades of experience, the next generation will then have a clear process to follow. It may take some troubleshooting to get the methodology right (so it reflects the correct price), but it will be worth it in the end!
Professionalizing a business—which, in this example, involves developing a pricing policy/strategy—provides comfort for retiring owners, allowing them to relinquish control while knowing the next generation has the proper tools in place to effectively handle the aspect of determining a custom price. What’s more, it allows new owners the opportunity to participate in the custom pricing process sooner.
In my profession, I often hear owners nearing retirement say, “I am too busy to implement this process,” or, “It’s just easier if I do the work.” Unfortunately, sentiments such as these only add to the problem at hand. While professionalization isn’t overly difficult, it can be time consuming and frustrating for first-generation owners. For incoming operators, however, implementing and having clear operational structures—ones that are supplemented by operational systems, processes, and communications—provides a solid foundation to sustain continued growth and safeguard family harmony. As such, professionalizing while also integrating the next generation into the business should be a priority.
‘Smooth sailing’ suggestion
In keeping with the above example, the first-generation owner should walk through custom pricing procedures with the next generation while the latter documents the process. Once the methodology has been written, the documentation should be reviewed to ensure it works, then approved as a procedure.
Once this is in place, the incoming generation can do custom pricing on their own. The first few times the methodology is used, the first-generation owner should review it to ensure it is in line with what they would expect. If not, this is an indication the process needs to be refined.
Don’t get discouraged—it may take a few tries to get it right!
As mentioned above, many founder-owners handled human resources (HR) and related departments as their operation was starting out. In many cases, however, these processes were never formalized. Thus, it is not uncommon for a family business to have employees on staff without contracts outlining specific benefits and pay rates.
When a business doesn’t have a salary range for each position or a formalized benefit package, it becomes hard to track what each employee deserves and expects. This, of course, can make HR decisions difficult. Far too often, employee history only exists within an owner’s head. This does little good in helping the next generation focus on running the business without needing to turn to someone else for answers.
For these reasons and more, when it comes to professionalizing the family business, HR is often the area requiring the most work. Outlined below are some of the most pressing documents required.
A formal organizational chart is essential, as this ensures everyone within the company knows to whom they report. Once this document is in place, employees should follow the appropriate chain of command. This is especially useful for family members active in the business, as these individuals are often unsure as to where they stand in the organization, which can be confusing for non-family employees as well. Often, relatives working in non-managerial roles within their family business are approached by employees who are seeking advice on executive decisions, which can create a confusing and frustrating environment for all involved.
Likewise, whenever possible, it is best to avoid having family members report to each other. An organizational chart can help alleviate some of the stress caused by an unclear reporting structure.
All company employees (including family members and active shareholders) should have employment contracts outlining roles and responsibilities, compensation, benefits (including numbers of vacation days and sick days), hours of work, dress code, and expected behaviour with staff and customers. Additionally, this document should acknowledge the staff member has read the employee handbook (if in place). Ensuring salaries are paid consistently can also help minimize conflict amongst employees and reduce instances of disgruntled or unsatisfied staff members.
Assuming each role within an operation has a clear job description, annual performance reviews for all employees (including all family members) should be conducted. Additionally, all new employees should have a performance review within six months of joining the company and then on an annual basis.
Ideally, family members should have their reviews completed by a non-relative. In situations where there is no viable non-family member to complete an employee’s performance review, a third-party company can be brought in to facilitate. This practice can also be useful when non-family managers feel uncomfortable reviewing the performance of a family staff member. After all, while this individual may be a subordinate now, they may one day become the business’s owner—and the manager’s boss!
Like performance evaluations, annual compensation reviews should be part of ongoing HR activities. Pay scales/grids for each category of employee should be developed. This allows employees to progress up the scale as they gain experience and provides an employer with some degree of latitude in rewarding good employees.
All paperwork, including employment contracts/letters of hire, performance evaluations, and compensations reviews should be included in each employee’s personnel file (this includes family members and active shareholders).
Corporate culture typically reflects a business’s owners. Notions of how they conduct themselves, how they interact with people, how they dress, and so forth are all components of an operation’s corporate culture.
These expectations should be formally outlined in an employee handbook. As a business owner, ask yourself: what is the example or message you want to send to your staff, customers, suppliers, and community? A corporate policy/statement addressing this question (including use of social media pages, employee behaviour, dress code, etc.) should also be developed.
While the process of professionalizing is a major undertaking, it is necessary in helping future generations effectively grow, manage, and evolve the family business. Don’t underestimate the positive impact these internal structures, systems, processes, and communications can have on family dynamics (both within and outside the business) and among employees.
Consider professionalization as a form of insurance; a reassurance that decades of decisions, experiences, mistakes, and achievements can be used to continue to build success for decades to come. Indeed, there is no need to start from scratch. For those who started a family business from the ground up, many valuable lessons and best practices have already been learned. Passing along these experiences could be one of the best investments one makes in the long-term success of a business.
To aid in the implementation of professionalization processes and procedures, many of my clients appoint the next generation to take the lead, as they will be the ones to carry the business forward. In doing so, they may need the added help of outside advisors. The important part is to start the process—slow and steady wins the race!
Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate management and ownership succession. She is a chartered professional accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. She and her father recently published a book titled A Practical Guide to Family Business Succession Planning: The Advice You Won’t Get from Accountants and Lawyers. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached via email at firstname.lastname@example.org.