How to Run a Family Business
You've heard the statistics: Fewer than 30 percent of family businesses survive to the second generation, and just 10 percent hold on through the third. Sound bleak? It's not. Those are far better survival odds than for small businesses not run by a team of family members.
A tight-knit managerial circle, and the flexibility of related – and deeply invested – employees, has been proven to make a business resilient. It also can confer a significant competitive advantage and impress customers, who appreciate knowing they're dealing with someone who cares deeply, and who has the same surname that's on the letterhead. But family management presents unique and intense challenges, including day-to-day emotional dynamics and big-picture issues such as succession planning.
Inc.com spoke with experts who have firsthand family business experience as well as coaches and consultants who specialize in the psychology and the logistics of running a family business. They shared their research, pointers, and life experience.
Dig Deeper: Resources for Running a Family Business
Running a Family Business: Planning is Everything
It's easy to say any start-up needs a business plan, mission statement, and revenue projections. In a family business, it's not that simple. Nor might those standard documents apply – or even be necessary at first, experts say. In their place, however, a family business must focus instead on drafting agreements, clear expectations, and assigning clean-cut roles to family members.
"What I recommend families to do is to get as many agreements done in advance as possible," says Fernando Lopez, a Toronto-based relationship systems coach who specializes in family business at Bridgespace Consulting. "What are they hoping to achieve? What do they not want it to become? They should have their high dreams and their low dreams, and from there they can see how they want to work together."
Taken together, the expectations set by individuals within a family can form a powerful vision for the future, which will guide a business forward. Ideally, formal documents will codify family members' expectations. At a bare minimum, they must be discussed at the outset in some depth, according to Cheryl Stein, president of Stein Consulting and Coaching in Chicago.
"The families that are really smart about it, that set up rules, are typically the families who do not fall apart and end up never talking to each other again," Stein says. "Setting up rules when you are getting along can save years of heartache - even if you just set up a rough framework."
And she knows from experience. Stein served as a vice president of her family's multi-generation real estate company, working alongside her siblings, parents and grandparents to sustain their 80-year-old company. But a lack of clear expectations – and unerasable family dynamics – caused her to leave the business.
"While my father was alive, he always treated me like his little girl," Stein says. "I really couldn't work hard in that situation because my brain wasn't in it. So I went back to school."
Stein went on to study the traits of successful and unsuccessful family businesses. What's most important, she says, is taking time to design and discuss a system for long-term planning. It should be done at formal meetings, not piecemeal or around the dinner table.
"Making room for strategic planning is the most essential piece," she says. "Ask everyone: Where do we want to be in five years, as a family? As a business? And as an individual? The answers to those questions will change the whole landscape, because then when opportunities come up, you know they are opportunities."
When drafting a business plan – or even just laying the groundwork by brainstorming collective dreams for your company's future – its important to reflect on what makes you and your family unique, advises Kathy Marshack, a Vancouver and Portland-based psychologist and family business coach who is the author of Entrepreneurial Couples: Making it Work at Work and at Home.
"It's about knowing who you are and what your family style is, and designing your family firm around that," says Marshak. "Maybe you're all super go-getters and want to take your business online and international – good, go for it. Or, if you're content running the business out of your house, and you don't care much about earning millions, that's great – just make sure you're all on the same page."
If you're working only with one partner, and you are in a relationship, whether casual or spousal, it is advisable to document your business relationship in a formal business-partnership agreement. The document should, at a minimum, include duration of the agreement, partners' capital contribution expectations, and divisions of profits and losses. You can also include salaries, job expectations and terms upon which the partnership may be dissolved. If this sounds like a business prenuptual agreement, that's exactly what it should be, says Marchack. But the agreement shouldn't reflect or foment hard feelings: It's designed to protect both partners in the business.
"When you love somebody, when you trust a sweetheart or a spouse, you think you don't need a business partnership agreement – you're afraid the other person will think they're not loved," she says. "But I've seen a lot more heartache come from not having a legal agreement laid out beforehand as to who owns what should partners need to part."
Dig Deeper: Why Some Family Businesses Thrive Generation after Generation
Running a Family Business: Defining the Relationships
Part of setting clear expectations is also in the present. Making sure every employee – er, sibling or child – is content requires not only outlining, but also maintaining every individual's responsibilities in the business. That can be accomplished through implementing some simple human resource tools, such as classic job descriptions. But if you're just starting out, you can let the process begin organically due to the unique and sometimes sensitive nature of family relationships, experts say. After all, everyone involved has a big stake in how the business succeeds.
Stein suggests as a starter, plan family business meetings. Don't rely on discussions around the dinner table to run a business. "What typically happens is you're running the business and you're mired in the business, so you rarely sit down to make a point of discussing what's going on," she says.
Another rule to determine – either collectively as a business or as a CEO making policy – is who, in the present and future, is part of the family business. Decide what qualifications are necessary.
"Do you want them to have outside experience? Do they need to have education? Does everyone in the family get a job here? Or are there boundaries?" she says.
Making an employment policy includes deciding on compensation standards as well as expectations for employees. And before you think about the future, set guidelines for the present.
"One idea that I've often asked people to do is for them all to talk about what they feel they bring to the table, and what they feel the rest of their family members bring to the table," Lopez says. "It helps to decide what roles its best for each member to take on."
If you're a small business without many formal HR policies, it can still help to give everyone a job title, description, and performance standards. Rewards are key – whether it be a certain title that a family member desires (and lives up to) or a certain salary they need.
Marshack says men at the reins of a family business need to especially be aware of the significance of their children, mother or wife's contribution to the business. "People have in their mind a certain amount they believe they are worth. It doesn't matter what that number is, but if you're not paid a certain amount, you have grumpy people," she says. "Even in this day and age, I see businesses where the women are not paid, or are not paid as much, because they are just seen as helping out." There's a difference between casual advice or a friendly coffee run and full-time receptionist duties. If a partner, spouse or child is providing more than occasional task work, they should be fully compensated for their time.
In his book, The Survival Guide for Business Families, Gerald Le Van stresses the importance of fair compensation. Reasonable benefits should come "along with an understanding of money, it's meaning, its potential, its limits, what is involved in making, spending and saving money…" There is a relationship between money and self-esteem, he notes, and as the manager of a family business, that's something you need to be cognizant of nurturing.
Dig Deeper: When an Entrepreneurial Streak Runs in the Family
Running a Family Business: A Focus on Healthy, Productive Communication
It's one thing to say you'll try to communicate better with family members, but it's another thing to actually do it. Experts say this is one of the most difficult parts of running a family business.
If you're willing to set up strict guidelines from the start, the ideal situation is to draw a clear line between family and business discussions. Just as you shouldn't discuss Cousin Terry's wedding shower plans at work, you should not let business intrude upon a family dinner. Doing so would not be fair to work productivity – and it's not conducive to a happy home life either.
That said, your family is still your family. You have a set of existing relationship tropes that, whether productive or counterproductive, are difficult – and sometimes impossible – to break. "At the end of the day you are still family members, and you are typically going to revert to certain patterns of behavior," Stein says. "If your brother used to take your toys and break them, there is going to be something that triggers that anger in the office. The best thing to do is realize that is just a fact. Recognize that."
Lopez, whose work tends to focus on family conflicts within small businesses, observes that individuals tend to look at relationships in very personal terms, as in "John is like this, Peter is like this, and I am very frustrated with what they are doing."
Instead, he suggests it is healthy for individuals looking at dynamics within their family business as part of a system. If an individual is frustrated, consider that there is frustration within the system.
"What I ask families to bring on is a systems perspectives," he says. "Every voice you have about the stystem becomes not personal, but a critique of the system. And then you can constructively work on mending it."
Dig Deeper: Managing Relationships in Business
Running a Family Business: The Bottom Line
"Free of pressure from public shareholders, family companies can take a longer view of profitability – and go for growth over a decade or a generation," Le Van writes. That long-view mentality takes the pressure off focusing on quarterly earnings – or of needing to cope with lackluster numbers by, say, downsizing.
Even so, a family business is still a business, and financial trouble in a family business can be cause for serious alarm. Here are some tips for maintaining a family focus on a company's economic well-being.
• Keep solid books. By incorporating basic fianancial tools used by other businesses, including balance sheets and income statements that are prepared regularly for distribution among family members. By sharing and analyzing financial data, you can make your business more predictable, and thus more stable. If no one in the family has a knack for financial analysis, establish a relationship with an outside accountant. Over the long term, strong financials will be an absolutely essential tool.
• Build consensus. Don't be overly casual when it comes to planning and strategy. Act like you are running a proper business and schedule regular meetings. At those meetings, you should start by noting that, while everyone might be coming from a different perspective, you should strive to focus at once on a single issue and resolve it. Draft an agenda before any meeting, and be sure to remember to bring a group perspective to big issues, such as improving your P&L or coming up with a vision for the future.
• Don't always let family come first. "The interesting thing about family businesses is that they have a tendency to sometimes make decisions that are better for the family than for the business," Stein observes. Let's say some of your relatives are taking a vacation and they want the rest of the family to join them. Who will run the business in the absence of the family members? If you don't have a good answer to that question, than somebody should sacrifice the trip.
• Focus on the present, as well as the future. Succession planning tends to dominate the management conversation at intergenerational businesses. But you should also spend time looking for ways to get the generations working productively in the here and now. "Who wants to train somebody so that they become obsolete? We need to learn to put more of a focus on working together and leveraging the best," Stein says. "Using each others abilities to propel business forward, not on propelling people out."
Dig Deeper: Relative Success in Any Economy
Running a Family Business: Dealing with Succession-Planning Stress
A big part of making sure your business succeeds into the future involves handling leadership transitions with finesse. For businesses that appear likely to pass through several generations, succession can become an all-consuming issue. It's absolutely tricky for many reasons, and thus must be managed with a gentile-but-steady hand. The process must also be open to everyone.
Although succession planning is an entrenched part of the basic thinking about family businesses, owners need to take a step back during the process, Marshack says. "You have to be careful and you have to make sure your business can accommodate taking on the next generation. Everyone thinks 'I want my child to work for me,' but can the business really afford that?"
If you believe your business is sound enough to last through the generations, let the grooming process commence. But be open-minded and equal-handed when working with several offspring in the same age bracket – and allow them to drive the process. Certainly, children can develop at different rates and at different ages. The one who professes to love the business at 18 may discover a new passion while at college, and the one who dislikes finances and bookkeeping might just become management material after high school.
Just remember: when any successor is being considered, they must also fit all of the prerequisite conditions you've set for your business's future. Ask yourself: would you hire someone with this child's life experience and education to replace me?
"Why would you want someone taking over your business who's never gone out in the world and proven themselves?" Marshack asks. "If they'd never had to take care of themselves, they may not feel any urgency about taking care of certain problems."
As part of the grooming process, you'll need to bring your successor into the managerial fold by not only exposing them to important business decisions, but allowing their voice to be heard. Also, expose them to any and all future conditions you've set upon the business, including dreams and goals.
The situation can get tricky when you're in an old family business and have a young family. It's natural to think from the start that your children will be part of the business. But how much do you actually want to groom young kids for their future in specific roles in your business? That's an extremely complex question, with sociological and psychological ramifications.
Stein advises that this is one area in which you might want to advise outside counselors, especially in the family counseling field. A modern interpretation of family studies might advise to allow your child to pursue any interest they demonstrate. But Stein says that as parents in a family business, "we have this responsibility to in how we raise our children, so that the legacy of the business continues."
"It's parenting under the guise of employability in a business, in a sense," she says. "You have to watch, from when they are little, the message you are sending them. And it can be accomplished."
For Lopez, when dealing with his family's business – his grandparents owned two hotels – he has found succession planning the most challenging issue. The transition, he says, needs to be eased by not only putting the right people in place to take the reins, but that everyone else in the clan knows what their role will be. Any existing conflicts, whether legal or simply emotional, should be out in the open.
"The strongest recommendation is to bring all of the things that might be under the surface to the surface before leaving the business," Lopez says.
Simultaneous with succession planning should be exit planning for yourself. A necessary part of that is logistical: what will happen to properties, operations and taxes when you are gone? Cliff Ennico, in his book Small Business Survival Guide, calls the impact of estate, death and inheritance taxes when the company founder dies one of the "biggest problems facing a closely held family business in the United States." With a federal estate tax that can be as high as 55 percent of the estate's value, family businesses with successors who are eager to take over future business can be forced to sell the business in order to pay a massive tax bill.
In order to avoid such catastrophic taxes, he suggests using a planning technique that involves creating a family limited partnership. The founder would transfer his or her shares to the partnership, of which the founder's spouse and heirs can be partners by making small contributions. However, FLPs are tricky to set up, so Ennico suggests enlisting the help of a lawyer who specializes in trusts and estates.
Dig Deeper: Choosing a Successor
Running a Family Business: Enlist Outside Expertise
Yes, your business is your family's – but there are times when outside experts are necessary to bring into the fold.
• During Growth. If your business is thriving, but members of the family are weighed down by innumerous responsibilities, then it's time to hire outside help. For many family businesses, it seems logical and most cost effective to hire from the bottom-up, by bringing in workers to handle clerical work or packing and shipping. Resist that urge and instead consider hiring a seasoned manager with real expertise in an area where you are currently lacking.
Before you hire a big shot, of course, it's important to discuss the decision with everyone involved. It's also important to know basic human resources standards that your family might be skirting. You must establish basic practices, such as fair payroll, a clear job description, and a reasonable work schedule for the new hire. (Just because you and your brother work weekends doesn't mean he or she will have to.) And remember, the standards you hold that person to – and benefits they reap – will need to be established across the board if they are not already.
• During Important Decisions. Even if your family is tight-knit and business is thriving, many experts still suggest enlisting an outside board of directors to advise management and help make important decisions concerning the company's future. A board of directors made up of outside of the family who are business-savvy and work in non-competing fields can help with everything from conflict resolution to financial planning.
"It helps to have an objective review, because you're not going to have an objective voice within your family, no matter how hard you try," Marshack says. "People who run a family firm will often be more clear-minded when they know they have to answer to a board on important decisions."
Stein agrees that an outside board can instill a sense of accountability and perspective at even the smallest family business. Members of a board of directors need to be compensated for their time, of course. If your small business is unable to pay boardmembers, you can turn to one of the dozens of local family business centers that have sprung up around the country. Often by donating a bit of your time to help other businesses as part of a peer-advisory group, you'll get the same support from individuals not in business competition with you.
"Literally from Rutgers to the University of Vermont, to Toledo, family business centers are popping up all over the United States because of the recent public knowledge of how much of the country's backbone rests on family businesses," Stein says.
• During Conflict. Whether you are part of a husband-and-wife team or an intergenerational family, you know how to push your business partners' buttons like no other. When conflicts of an emotional or family nature arise, and don't resolve themselves quickly, consider bringing in a relationship coach, mediator, or family business counselor. An individual counselor can work on issues too personal to bring to a board of directors. And any advisor hired should be allowed – and encouraged – to meet and speak with all members of the family regarding their goals, concerns, and stresses.
Dig Deeper: In Praise of Competition in Family Businesses
Running a Family Business: Additional Resources
Never Quit: The Ups and Downs of Running a Family Business, by Donna M. Gray. Veda Communications, 2004.
The Survival Guide for Business Families, by Gerald Le Van. Routledge, 1998.
Small Business Survival Guide: Starting, Protecting, And Securing Your Business for Long-Term Success, by Clifford R. Ennico. Adams Media, 2005.
Entrepreneurial Couples - Making it Work at Work and at Home, by Kathy Marshack. Davies-Black Publishing, 1998.
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