Family Businesses + How to Operate Like the Pros

Family businesses are the backbone of our economy, being the single biggest job creator and accounting for over half of the U.S. gross domestic product.  While there are many benefits to running a business with family members, there are also a host of challenges.  Statistically, only one in three family businesses survives to the next generation.  So how do you position your business to be one of the survivors?  The key is to operate it like the PROS, focusing on Procedures, Roles, Outside Advisors, and Succession.

PROCEDURES

"We are what we repeatedly do. Excellence then, is not an act, but a habit." - Aristotle 

There’s a natural tendency to operate more informally when you’re doing business with your family.  After all, if you can’t trust family, who can you trust?  Regardless of the familial tie, miscommunication and hurt feelings can result if business relationships aren’t defined.

Best Practices:

1. Document everything: Don’t rely on verbal agreements unless you want conflict down the road. Formalize in writing contracts, operating procedures and any other issues that could be misconstrued in the future.
2. Communicate regularly: Communication is the key to fostering cooperation, collaboration and trust-essential ingredients for a family business. Scheduling weekly meetings to analyze progress and resolve disputes is a good way to keep the lines of communication open.
3. Operate like a formal business: It’s important to use formal business practices when running your family business, especially as the business matures and multiple generations become involved. Having defined processes in place provides operational direction, clarifies boundaries and ensures a high level of company performance.
4. Respect boundaries: It’s tempting to talk about family business whenever the opportunity arises, but it’s not a good idea if you want to foster family harmony.  A good rule of thumb is to collectively agree not to discuss work-related issues at family gatherings and holidays.

ROLES

"When you're in a small boat, you can see who's paddling hard and who's looking around." - Ev Williams

It’s easy to understand why you would want family members to work in the family business.  Trust, familiarity and like-minded thinking, coupled with having a stake in the game, make them desirable employees.  However, you should proceed with caution before allowing loved ones to collect a paycheck.

Best Practices:

1. Focus on talent: Employment in the family business should be based on ability versus affinity.  The focus should be on what the family members can add to the business by way of talent, knowledge and experience.  Family members should be a good fit for an existing job, not have a role created for them. Having a written employment policy that outlines the rules for entry goes a long way to manage who is eligible to work in the business.
2. Use job descriptions: It’s essential to clarify job roles and responsibilities, especially in family businesses.  A job description is a useful tool when it comes to divvying up the workload. It details the primary job function, specific duties and tasks associated with the position, as well as the requisite experience and skills.  Having distinct roles and mandating people stay in their lanes can alleviate family conflict and maintain a level of professionalism in the workplace.
3. Define decision-making: It might be implied the senior family member or majority stakeholder gets the final say on important matters, but it’s best to articulate the lines of authority clearly.  Letting others know what decisions they can make on behalf of the family business and allowing them to make them goes a long way to foster efficiency and avoid hurt feelings.
4. Treat family fairly: It’s important for overall employee morale not to show favoritism when employing relations, but it’s equally as critical to treat family members fairly if you want them to stick around.  Family members who work in the business should be held to the same set of standards as non-family employees with respect to expectations, compensation, working conditions and performance reviews.
5. Require relevant experience: Although there is no standard rule, many families require outside work experience before entering the family business to enhance skills and provide perspective. If you have young family members that want to work in the business immediately, consider having them start in entry-level roles to gain familiarity with the operations and develop a strong work ethic.

OUTSIDE ADVISORS

"Really great people make you feel that you, too, can become great." - Mark Twain

Working in a family business can make it hard to see the forest from the trees at times.  Consulting outside advisors can be just what your business needs to broaden perspectives and provide a reality check.

Best Practices:

1. Establish a Governing Board: If you’ve been operating under an informal governance process, it may be time to form an independent board of directors that includes non-family members.  Objective outside advisors can provide the knowledge, skills and experience your team may be lacking.  Serving on family boards can be tough because of the interpersonal dynamics involved.  Careful consideration should be given to selecting the right candidates for the positions. Key qualities of a desirable board member include integrity, industry experience, vision, connection to family, competence and discretion.
2. Be Open to Outside Advice: Seeking outside advice might be exactly what’s needed for long-term sustainability.  Advisors can serve as sounding boards for family members, provide fresh business ideas, and give constructive criticism when warranted.   It’s not easy to grow a family business when you are entrenched in running it; obtaining advice from trusted advisors is a strategic way to gain vision and clarity.

SUCCESSION

"A leader's lasting value is measured by succession." - John C. Maxwell

Succession is often a taboo subject, especially if there are multiple family members involved.  It’s difficult to relinquish control over a company you’ve spent your life building.  Whether you like it or not, eventually you will transition.  It’s better to be proactive about it than being forced to make a change when the timing or circumstances may not be optimal.

Best Practices:

1. Start early: Are you planning to have your children take over the business when you decide to let it go? If so, you need to start early to teach them the skills necessary to run the company well.  Technical issues like business valuation, estate planning, taxation, ownership interests, voting rights, and buy-sell agreements also need to be addressed; all things that take time due to their complexity.

2. Work with advisors: Succession planning is multi-faceted, and most family business owners have no idea what is required for a smooth transition.  Family business advisors can be used to provide counsel, communicate the plan and prepare the necessary succession documents.  Utilizing the expertise of outside advisors is a necessary step in ensuring all the critical issues have been addressed.

3. Understand the financial ramifications: You need to make sure you understand how the transition impacts your personal financial plan.  It’s likely your income stream will change with the passing of control, and you need to be comfortable with how that will affect your lifestyle.  The last thing you want is for chaos to ensue because financial necessity is preventing you from stepping down. 

Running a family business is not for the faint of heart.  It takes considerable fortitude to balance the good of the business with the needs of the family.  By taking the steps necessary to act like the PROS, you’ll be better positioned to sustain your family for generations to come.