Social capital and your business

Family businesses are still booming in America — and throughout the world. Consider that they make up the vast majority of U.S. businesses and one-third of the S&P 500 companies. What’s more, 40% of the 250 largest businesses in France and Germany are also family run.

It’s easy to understand the appeal of family businesses: they provide a unique opportunity for budding entrepreneurs to pool together family resources to launch ideas and companies. Yet despite their appeal — and the strong performances of those that are well managed — family businesses often don’t survive the third generation.

So why, exactly, do some businesses continue to succeed through multiple generations while others don’t? The answer, according to many business experts, actually lies in something intangible: social capital.

Though the term “social” may sound like something innovative, the concept of social capital has been around since 1916. Author Lyda Hanifan was the first to refer to it as “those intangible assets [that] count for most in the daily lives of people: namely goodwill, fellowship, sympathy, and social intercourse among the individuals and families who make up a social unit.” It’s borne from the shared values and trust that can only be found in family relationships.

While social capital is inherent in tightly knit families who run businesses, it can present challenges. For example, lines can sometimes be blurred between professional and personal issues, thereby intensifying business concerns. Businesses that can manage challenges such as this are better prepared to achieve long-term success.

Managing and harnessing social capital isn’t easy; it requires commitment, collaboration, dialogue, interaction, and very often, the guidance of an experienced outside advisor who can provide a set of ground rules. Whether that advisor has expertise in financial planning, corporate finance, legal structuring, business succession, or perhaps even psychology, they can play a pivotal role in helping create multigenerational success.

Working within the unique dynamics of the family, the advisor can help create a system that incorporates the values which family members hold dear. In his book Family Wealth: Keeping It in the Family, James E. Hughes talked about the importance of maintaining this throughout generations.

The duties of the advisor will vary by expertise and business but may involve facilitating and moderating family meetings, establishing agendas, preparing financials, and establishing deliverables, all of which are critical to the current and future success of the business. In managing these tasks, the advisor can help build an environment where information is exchanged, ideas are developed, operations are enhanced, capital structure is improved, and a succession strategy for the future is created.

Managing a business is challenging for any business owner. However, those involved in family businesses face unique and difficult challenges when it comes to business succession. The right advisor will not only take the time to understand a family’s existing dynamics and social capital, but also to develop a system that manages and strengthens that capital — for today and generations to come.

Working alongside a financial professional can help you navigate the future and reach your potential. To learn how our Wealth Advisors can help you, please call 1.877.670.5400, visit us online, or visit your nearest Citizens branch.