The Family Protocol: The Key to Continuity and Success in Family Businesses

The Family Protocol: The Key to Continuity and Success in Family Businesses

The Family Protocol: The Key to the Continuity and Success of the Family Business

It is common for business ideas to arise within a family and materialize into projects, leading to the creation of a company. These businesses reflect the vision of their founders and, like any venture, face challenges that require proper management.

Over the years, family businesses have been the subject of study by many business schools worldwide. The additional challenges of integrating family ties with business operations have led to the development of various models and theories aimed at understanding their unique dynamics.

This article will address those additional challenges faced by family businesses and provide recommendations for their proper management and long-term survival. Family businesses have a significant economic impact, yet they also experience a high failure rate. The close interpersonal relationships among partners and the emotional involvement of family members make it almost impossible to separate personal and business matters, which can negatively affect business development.

First, it is essential to move away from the paradigm that a family business is synonymous with a small, slow-growing enterprise that serves only to sustain the family. In fact, “it is estimated that family corporations generate more than eight trillion dollars in revenue and employ over 24.5 million people worldwide” (Ruiz-Roso, 2023), making them a key player in the economy.

Today, there are many large family-owned companies that have been managed successfully and have endured over time. Some of these include Walmart, Ford, BMW, and Toyota—multinational giants that started as family businesses and still maintain significant family involvement, whether in management or ownership.

Honduras is no exception. It is estimated that around 90% of micro, small, and medium-sized enterprises (MSMEs) in the country are family businesses, significantly impacting the national economy.

However, not many family businesses manage to survive across generations or evolve into larger, more efficient business models that ensure continuity. Only one-third of family businesses worldwide make it to the second generation—when the founders’ children become involved in decision-making and/or management. Of that third, only 10% survive into the third generation—when the founders’ grandchildren (cousins) participate in decision-making and/or management. And of these, only 5% make it to the fourth generation (Bermejo, 2020).

The intersection of assets, business relationships, and emotional ties creates a complex environment that requires careful management through corporate governance. This dynamic is explained in the Three-Circle Model, developed by Harvard Business School in the 1970s, which illustrates these aspects as three overlapping circles forming a complex ecosystem.

This business-family-wealth relationship can lead to conflicts, especially during generational transitions. Conflicts tend to intensify as more generations become involved in the company’s ownership and management. Differences in business vision, family values, and individual interests become more pronounced, explaining the high failure rate.

For this reason, it is crucial for family businesses to establish a clear set of rules that define succession plans and business values. In a family business:

“Over time, ownership typically shifts from being highly concentrated to more widely distributed, from a single leader to a multi-leader scenario. This transition is akin to moving from governing with an absolute majority to operating with a relative majority, where negotiation and consensus are necessary.” (Bermejo, 2020).

Thus, family businesses must develop corporate governance mechanisms that provide future generations with guidelines for resolving disagreements through consensus. According to the Fifth Edition of Deloitte’s Family Business Survey, which surveyed 791 family business executives across 58 countries, “only slightly more than half believe their business is prepared for the future in terms of ownership, corporate governance, and strategy” (Deloitte, n.d.).

In Honduras, a study conducted by COHEP in collaboration with other national institutions found that out of 253 surveyed companies, 69.6% were still in the first generation, while only 0.12% had reached the fourth generation or beyond. Additionally, only 27.7% had a family protocol in place (COHEP, 2019).

The Family Protocol: A Key Instrument for Proper Management

The Family Protocol is the ideal tool for family businesses to effectively manage the potential conflicts inherent in their nature. It can be defined as:

“A document that addresses topics related to the business-family relationship, reflecting the commitment of family members to uphold the agreed-upon rules. Its ultimate goal is to ensure the continuity and successful survival of the family business across generations.” (Bringas, 2019).

The Family Protocol aims to establish clear succession and management rules, strengthening the family unit while ensuring the company’s smooth operation. Since it must be tailored to each family’s specific needs and characteristics, it should be carefully crafted.

Developing a Family Protocol is a complex task involving multiple activities, from reviewing corporate documents to conducting meetings and interviews with family members to assess their situation and anticipate potential conflicts.

Key Aspects to Consider When Creating a Family Protocol

a) Reviewing the Corporate Charter: The protocol must align with the company’s founding documents. Often, corporate charters follow standard templates that do not reflect the true purpose, management, and organization of the business. Drafting a family protocol presents an opportunity to revise and adapt these documents accordingly.

b) Hiring an External Advisor: Since the protocol seeks to address real or potential conflicts between the family and the business, it is crucial to work with an external advisor. This advisor acts as an impartial mediator, guiding family members toward agreements rather than imposing conditions.

c) Conducting a Thorough and Thoughtful Analysis of the Family’s Situation: This stage is both complex and critical, as it requires family members to assess their circumstances and identify potential conflicts that may arise during key moments in the business’s life. They must also reach agreements on how best to manage these issues. Common conflicts include:

• The introduction of external shareholders, which may require sacrificing ownership for greater financial benefit.

• The salary structure for family members.

• The competencies required for family members joining the business, ensuring opportunities are based on merit and skills.

• Succession and inheritance planning.

d) Creating a Clear and Flexible Protocol for Succession and Participation in the Business: The protocol must be tailored to each family’s unique needs but should include essential elements such as:

• The founder’s message.

• The company’s vision, mission, and values.

• Compensation policies, including salaries, allowances, and dividends.

• Conditions for family member loans.

• Membership rules: defining future generations’ roles, the involvement of in-laws, and whether non-family executives will be allowed.

• Asset management: establishing clear rules to differentiate between company assets and personal family assets.

• Conflict resolution strategies, such as family assemblies to address unforeseen issues.

Conclusion

Family businesses are among the world’s most significant economic forces, and Honduras is no exception. However, they face a high failure rate due to the complexity of managing the relationship between family, business, and wealth.

To ensure their longevity and strengthen family ties, family businesses must establish a Family Protocol that regulates their unique operational ecosystem. Taking early action to set clear rules can help resolve issues before they escalate into conflicts that jeopardize the company’s commercial activity and weaken family foundations.

If you own a family business and do not yet have a Family Protocol, Lexincorp can assist you. Our team of experts is ready to help. For more information, contact us at cpecorelli@lexincorp.com.

Written by: Carlos Pecorelli