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How to Generate Emotional Attachment to a Business

The Emotional Value of a Family Business

The economic value of a firm can be defined by the share price and the dividends owners receive. By contrast, the emotional value is the families’ attachment to the business. It is like a glue. And the higher the emotional value, the higher the power of the glue.



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Economic vs Emotional Value

The economic value of a firm can be defined by the share price and the dividends owners receive. By contrast, the emotional value is the families’ attachment to the business. It is like a glue. And the higher the emotional value, the higher the power of the glue.

Consider a wedding ring: If the marriage is good, you would not sell the ring for the purchase price. A buyer would need to offer a much higher price to make you part with your treasured possession. The difference between the economic value of the ring and the price you would sell it for is the emotional value. However, the emotional value can become negative. If the marriage is bad, you might sell the ring below the purchase price. You might even throw it out of the window. This is the same with a business; if there are conflicts, owners can be tempted to sell their shares and leave.

In the first generation of a family business, emotional attachment is high because the founder has built everything. In subsequent generations, emotional attachment decreases. This occurs naturally as the business and the family grows; family members grow-up in different places, have different plans for their lives and have different involvement in the business (some are only owners, others work in the business). A solution for this natural development is the implementation of a sound family business governance, which leads to a family constitution (synonyms: agreement, protocol or code).

Generating all stakeholders involvement

Before developing a family constitution, raising awareness of the responsibility that is attached to owning a business is indispensable. Family owners should understand that they have inherited the business to pass it on. And they should see, that a family in harmony develops better the business, but a family in conflict can destroy it, and then for sure will also destroy the basis of privileges like dividends.

Those family members who lead and manage the company, should recognize that it is difficult to fight a war on two sides. It is hard enough to win the battle for customers. Having a battle within the family creates additional complications. A family constitution can help to prevent the family battles. And in some cases, the older generation is reluctant to develop a family constitution. However, they could see that the next generation likes to solve their specific challenges together in a transparent process. A family constitution process could be a possibility. However, the younger generation should get permission to start the process of building their house of the future and then get feedback when they have a first draft of the constitution. This will lead to a structured discussion between the generations.

Preventing conflicts

A family constitution should be seen as a preventive instrument. Its purpose is not to solve conflicts. However, to be able to prevent them, especially the ones like dividend distribution or the rights and duties of directors and owners, it should be legally enforceable, through the help of a shareholder agreement. Families can also include sanction mechanisms in the family protocol and the shareholder agreement to protect the family if one member does not comply with the agreed rights and duties.

In case of conflicts among management, it is important to bring in outsiders: non-executive, non-family board members. They may suggest new opinions, solutions and can play a role of a “deciding voice”.

For family conflicts, there should be a trusted, unbiased Chief Family Officer, a family member who is responsible for family matters. He or she should act as a mediator if there is a conflict arising which the two parties cannot solve themselves. To prevent conflicts about succession and roles, rules should be included defining when and under which conditions, a family member can work in the business and can be dismissed.

In addition, general conflict management rules can be defined. For example: define and name the conflict within 48 hours, otherwise it is forfeited; do not talk “behind the back” of others; contain the conflict within the family – do not let it leak into the wider business; avoid using lawyers.

The right process – with what to start

For the constitution to succeed, it is important to follow a structured process in which all family members get involved. A good process begins with holding a workshop, done by an external expert, to analyze the business and each member’s individual situation. This way, the whole family understands the challenges and starts to think about the solutions together. Then, in the following workshops, the family constitution can be developed. In average, families need three to five workshop days.

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