The 10 Competencies Every Family Business Owner Needs

Bob Stafford (a pseudonym for an actual person), a 60-year-old third-generation CEO of his family's precision manufacturing business, was a great leader and a unique mentor. Neither of his children showed much interest in the day-to-day operations of the manufacturing company. His daughter, Sue, was a successful pediatrician, and his son, Paul, was completing his Ph.D. in anthropology while focusing on his young family. Despite knowing they would one day become owners, neither paid much attention to their father's business. However, when Bob and his wife, Maureen, tragically died in a plane crash, Sue and Paul suddenly inherited 100% ownership of their father's business.

Unfortunately, they had no idea how to be effective owners.

Assuming that the professional managers would capably run the business, Sue and Paul quickly learned that being unprepared for ownership had significant downsides. Over time, the managers shared less information about the company. They made major decisions without consulting the owners, including suspending dividend payments, and later revealed they had channeled funds into their own pockets through exorbitant compensation packages. In a final blow, the managers persuaded Sue and Paul to sell the “struggling” business to them at a fire-sale price.

This tragic ending to the family business that their father had built over a lifetime is, unfortunately, not uncommon. Many family business owners, despite their education or background, often find themselves unprepared for ownership. Even business school programs rarely teach what it means to be an effective owner. Most courses focus on public companies, where owners are investors primarily concerned with buying low and selling high across a diversified portfolio. In these contexts, owner influence is minimal, with the CEO making most decisions.

Family businesses, however, are entirely different. Owners typically have a substantial portion of their net worth tied up in the company, along with a significant emotional investment because of the business's history and legacy. They are committed to a single business rather than a diversified investment portfolio. Ownership in a family business is potent, conferring the right to make decisions on nearly all aspects of the business. The choices made by owners, whether through action or inaction, significantly influence the company's long-term success or failure.

For a family business to endure, owners must be prepared to fulfill this pivotal role. The good news is that anyone can learn to be an effective owner. It doesn’t require advanced degrees like an MBA or a law degree. What it does demand is a willingness to learn and apply the principles of ownership effectively.

What Defines an Effective Owner?
Drawing from their experience working with family business owners globally, we have identified 10 competencies that every owner should cultivate to guide their family business effectively. Notably, these competencies do not equate to managing the business actively, as family business ownership is distinct from management. Owners can be effective without getting involved in daily operations, but they should develop proficiency in the following areas:

1. History and Values: Effective owners understand their family's history and the business's evolution. They appreciate the “oscillating family narrative,” recognizing both ups and downs in the family's journey and the company's development. A deep grasp of the family's origin story, business evolution and core values is essential.
2. Corporate Structures: Owners should comprehend how the business is structured, including ownership types like LLCs and S corps. Different corporate structures have distinct implications for owners, such as tax considerations. Understanding the structure can help manage tax obligations and reduce risks.
3. Estate Plannning: Owners must consider estate taxes in jurisdictions where they apply. They should master tools for transferring ownership effectively, such as gift-tax exemptions, trusts and life insurance. Understanding trust arrangements and the roles of trustees and beneficiaries is crucial.
4. Family Business Governance: Family businesses involve multiple constituencies, including family, owners, board and management. Owners need to grasp how decisions are made, their involvement in each constituency and their decision-making rights and responsibilities.
5. Corporate Governance: Effective owners understand corporate governance principles. They set and adjust these parameters through legal documents like articles of incorporation and bylaws. They also play a role in electing board directors, who provide guidance and support to business leaders.
6. Owner Strategy: Owners define success for the business, encompassing financial and non-financial goals. They develop an owner strategy that outlines their purpose, their objectives and guidelines for board and management decisions.
7. Corporate Finance: Owners need a basic understanding of business finance, including key metrics like total shareholder return, return on equity, debt-to-earnings and dividend payout ratio. Familiarity with valuation and transaction concepts is also valuable.
8. Personal Finance: Owners' personal finances affect the business's health. They receive a share of profits as dividends, but excessive reliance on dividends can hinder business reinvestment. Managing personal finances helps owners make better business decisions.
9. Communication: Effective communication is vital in family businesses, given the interconnected roles of family members, owners, directors and business leaders. Communication builds trust, which is crucial during challenging situations.
10. Negotiation: Owners frequently navigate complex family dynamics. Learning effective negotiation skills is essential for addressing various issues, such as family roles in the business and financial distributions.

Developing Owner Competencies
Developing these competencies takes time and begins by assessing current knowledge levels in each area. Owners should define minimum standards for competency. Families can leverage internal resources, engage in practical projects, work with trusted advisors, or seek education from business schools and specialized programs.

The authors emphasize that not developing effective owners can be disastrous for a family business, its legacy, and its future. While building owner competencies is a challenging task, it is a worthwhile investment for any owner group.