Doing business with family members is a time-honored tradition. Merit-based employment offers long-lasting rewards while entitlement presents greater risks.
There is the intellectual battle over whether entrepreneurs are born or made. When it comes to family-run businesses, entrepreneurial inclinations may very well present themselves in family members early on in life. Of course, one has to be on the lookout for entrepreneurial vim and vigor vs. youthful idleness. The head of the household—and the business—has to steer clear of any total thoughtless placement of family members within the company.
It is hard to be objective about hiring relatives, especially a son or daughter. But you have to objectively ascertain people's strengths and weaknesses before you bring them into the business, says Wayne Rivers, president of The Family Business Institute in Raleigh, North Carolina. For instance, you might have a popular, socially gifted daughter who is taking accounting courses in college but she doesn't really enjoy number crunching. You wouldn't want to say to that 'daughter you are going to be my new CFO when you graduate.' Rivers cautions, "You have to let people play up to their strengths instead of trying to shore up their weaknesses."
Family businesses are a long-established tradition. About 80 percent of the world's businesses are family owned, according to research from the Kennesaw State University Coles College of Business. Family-run businesses account for nearly 35 percent of the largest companies in the U.S. (60 percent of all public companies), including Ford, Koch Industries, Cargill, Wal-Mart, Loews, and Ikea. More than 30 percent of all family-owned businesses survive into the second generation. But only about 13 percent are passed onto the third generation.
Many family business consultants say the primary reason for this low survival rate and why some families don't work well together is the failure to put in place a strategic plan and set of guidelines. Family members can be part owners of the business, but that doesn't mean that they have to work inside the company, says Jane Hilburt-Davis, president of Cambridge-based Key Resources and co-author of Consulting to Family Businesses. "The door for family employment should not be open to everyone," she warns. "Don't create a position; it can't be a situation where someone won't make it out in the world on their own unless you give them a job in the family business." You want to prep and hire family members because they have a set of skills that the business needs.
NASCAR is an example of a family business in which the second generation trained, nurtured and handed over the reins to the third generation, says Rivers. Regarded as one of the most powerful men in sports, Brian France is the CEO and Chairman of NASCAR. The third-generation entrepreneur took the driver's seat from his father Bill France Jr. in 2003. Founded by Bill France Sr. in 1947, NASCAR is still privately owned and family operated; it has jettisoned from a regional race into a prosperous international enterprise.
Rivers says that France didn't just wake up one morning and decide he was going to be NASCAR's next CEO. He set a goal of learning the business from the ground up, to be accountable, to earn respect over time, and to be mindful of the traditions and legacy of his father and grandfather. Prior to becoming CEO, France managed NASCAR's marketing department and touring divisions; he was the creator of the Craftsman Truck Series. He thought things out pretty well about how he wanted to work and move up in the business, says Rivers. He prepared himself with the necessary tools to become CEO. He also studied about family businesses.
France runs the day-to-day operations of NASCAR and is given ample latitude to run the family business. But the board of directors retains the ultimate authority. France has said that the board gives the entire NASCAR management team, not just him, autonomy; there are expectations and a clear set of controls along the way. When an important decision has to be made France doesn't act alone, industry insiders say that he listens to his uncle Jim France, who is a board member and majority owner of NASCAR. Older sister Lesa France Kennedy is CEO of NASCAR's sister company, International Speedway Corp (replacing her Uncle Jim), as well a part owner and a board member of NASCAR. According to insiders the two siblings consult with one another on a regular basis.
The key to running a successful family business is to have shared values and good relationships within the family, says Gaia Marchisio, Ph.D., a professor with the Cox Family Enterprise Center at Coles College. "I tell parents to teach their children not to be competitive with their siblings or their cousins. They have to learn how to work together as a team. The point is not who the best is or who is winning over the others," she explains. "You teach them how to be able to share responsibilities and meet expectations. You teach them how to talk to one another to avoid personality clashes (or infighting)."
Running a successful family business doesn't mean running an entitlement program where if you have the right last name you come in, get a desk and a job. Hilburt-Davis says most family businesses failed ultimately because members were brought in by birthright. A first cousin might be more qualified than the eldest son to lead the company. Family members must realize that it is not birthright but meritocracy that counts. "You have to earn it," she says.
Business consultants stress that families need to build the path and to follow a road map for creating healthy and wealthy entrepreneurs.
How to Hire Family Members: Draft a Family Employee Policy
This is outside of the company's employee handbook. It is important to have crystal clear goals and expectations for family members in the business supported by clear management roles. The family employee policy should spell out what to expect when hiring family members, regardless if they are coming into an entry position or at the executive level, says Hilburt-Davis. This will help when you get those calls from Aunt Sarah who wants her son to work in the business. "You have a written document that says this is our family employee policy."
There also needs to be an integration plan for when you bring a family member into the business, says Rivers. What is his or her career path going to look like? "Most people just say here is your office, now get to work. Forget about training, there is not even any orientation."
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How to Hire Family Members: Define Roles and Responsibilities
The job description for most family businesses is to do whatever it takes. In the early stages of the family business, there is a tendency to have everyone pitching in, says Rivers. "You might be meeting with bankers one day and scrubbing toilets the next day. This is a recipe for confusion."
There must be written job descriptions, defined roles, rules for compensation, performance reviews, long-term and short-term goals or objectives, so that decisions are not based on family relationships. "There shouldn't be any surprises; family members should know if they are not reaching their goals or if they are on the right track for whatever position they are in line for," says Hilburt-Davis.
Is there a place for family members when there is no real role for them in the business? Some companies have set up an account or fund to help them start their own businesses, says Marchisio. They make investments in these family members' personal passions. Just be sure to establish guidelines for applying for such funds that could be gifts or loans. Others have set up a family foundation or community-based initiatives, such as a scholarship program, to which non-employee members can get involved. They coordinate and do the charitable work of the family business.
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How to Hire Family Members: Groom the Next Generation
Establish formal or informal programs. For instance, in addition to giving teenage family members opportunities to work in the business after school, you could actually create summer internships. Set up some type of mentoring program, suggests Marchisio. Young people can become apprentices to their older relatives and learn the inner workings of the business. Mentors should also include people from outside of the family, she advises.
The conventional wisdom is that family members should spend two to five years working outside of the family business at another company in the same industry. "Insider training is excellent," says Rivers. "It is not always a good idea to bring someone into the family business right away, especially right after college, who is going to be over paid and over scrutinized." Having a family member work outside of the company for a few years will not only help to build up his or her confidence but it will allow that individual to "make mistakes on someone else's nickel," Rivers adds.
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How to Hire Family Members: Don't Rely on Post-Graduate Education
Some family business consultants say to be skeptical of traditional post-graduate education, such as MBA schools. "The needs of your business are narrow and unique," explains Rivers, "an MBA education is very broad." Meaning, your son or daughter will learn how to work for Fortune 500 companies whereas you are running a manufacturing plant. So, "they are spending 90 percent of their time learning things that won't have any real life application to the family business."
That's not to say that you don't provide training and education. Rivers says that there are great resources out there for industry specific education, starting with trade associations as well as local community colleges. Of course, if the job description calls for an MBA or JD then family members can't forgo getting the proper background or credentials.
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How to Hire Family Members: Avoid the Sense of Favoritism or Nepotism
A clear line of communication between the head office and the field is crucial. Hold regular forums or meetings. Get key personnel together and do a focus group; use them to help integrate family members into the business. "If the work environment is professional and all employees are treated fairly, you won't get accused of nepotism," says Hilburt-Davis.
Rivers suggests you set some boundaries between family members and the family business by considering joining a peer group. "This will allow you to have other non-competing industry people looking over your shoulder and helping you find that balance." Also, use your board of directors or a board of advisors to provide objectivity. A third alternative he says is to hire outside business consultants.
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How to Hire Family Members: Focus on the Business Not the Family
There are basically two distinct models: family first and business first. However, research shows that business-focused family businesses tend to create more generational fortunes—$7 of net worth for every $1 dollar that a family-focused family business has, says Rivers. By focusing on the business first, enough wealth was created to take care of family members for generations to come, he explains. Family first businesses ironically ended up taking less good care of family members in the long run.
With the businesses that focused on family, certain perks were doled out or personal expenses were passed through the business. Bloodline meant employment was virtually guaranteed; meaning, no family member ever got fired. But Rivers says, "the needs of the business and not the needs of individual family members should always come first."
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