The Family In The Family Business

Written by Joe Driscoll

November 25, 2009

The family business has always been a major force in our economy. The building of a successful family business creates the potential for wealth, independence and a close working family . The dream can turn into a nightmare for both the family and the business without the special attention that the family business requires.

The family business must contend with problems common to all businesses. The balance sheet, the income statement, the customers, the employees and everything else must be well managed. But in addition to all of these elements, the family business has one unique element that requires special attention.

The family business differs from other businesses in that it must also manage the family! Ironically, this is where the family business, particularly the financially successful family business, often runs into trouble. Considering the magnitude of the responsibilities involved in managing a business and developing a family, it shouldn’t be so surprising.

The entrepreneurial business becomes a family business when a second generation or a second family branch of the same generation joins in exercising ownership and managerial control. Family businesses have distinct advantages and can offer exceptional rewards. In order to exploit those advantages and to realize those rewards, the family business must recognize that, in addition to managing the business, special attention must be given to the planning and managing of the family in the family business.

The family owned business can be vulnerable to a variety of special problems. An inclination towards paternalism is not uncommon in the family business. This most often results in placing a higher value on longevity than in competence. This appears to result in a high level of employee loyalty, but unfortunately for all the wrong reasons. It develops dependency and conformity that serves no one.

The changing needs of owners in a family business can present difficulties when a minority shareholder group decides to sell their shares. Since there will be no immediate market for the stock, a workable buy-sell agreement must be in effect before the need for one arises. The absence of an equitable agreement can be a traumatic experience for both the family and the business.

Nepotism can be a problem for the family business that does not maintain its objectivity. Business decisions must be first based on business factors. Family businesses must insure that they don’t become havens for incompetent family members. While the intentions are benevolent, the results are invariably negative. Even a family business exists primarily for the benefit of its customers. Only by first providing for the customer will the family provide for itself.

All businesses are susceptible to closemindedness. The strong willed head of a family business, surrounded only by his family and long time employees, can be particularly vulnerable. The “I own it, I know what’s best” mind set can isolate the family business from new ideas that originate from outside of the family inner circle.

Planning for management succession in the family business is a more complicated undertaking than in other organizations. Done well, it brings to fruition all the potential of the family business. Done haphazardly, as so often is the case, uncertainty for the business and frustration for the family are inevitable. To perform simultaneously the role of provider, parent, teacher and boss is no easy task.

In all family businesses there exists underlying tensions and uncertainty. The process of successfully guiding the family business from one generation to the next is complex. The economic and physiological well being of the family depends on the recognition and proper management of the family element in the business.

Good management of the family in the family business requires the acceptance of outside advisors that can provide experience and objectivity. The incorporation of external performance standards for evaluating performance, assigning responsibilities and sharing rewards will advance the interests of the business and avoid family tension. The development of workable shareholder agreements and a clearly defined succession plan for the management of the business will remove the ambiguities than can disrupt both the business and the family. Those running a family business must be able to differentiate between the privileges of ownership and managerial competence. Only by taking an objective orientation will the business be able to serve the true interests of the family.

There is perhaps no greater reward than building and maintaining a successful family business. The greatest asset and most satisfying reward in a family business is the family. Because it’s your family and it’s your business make sure that you take the right steps to manage the family in the family business.

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