Keeping It All In The Family
A ‘well-run’ family business is not necessarily a contradiction in terms. There have been many cases of successful family companies, and there will be many more to come. But having family aboard can be both a help or a hurt, depending on how things are handled.
Family ties are strong, and building a successful business takes a lot of single-minded blood, sweat, tears and sacrifice. How can one successfully mix love for family with the harsh realities of business? How do you prevent or resolve family conflicts, favoritism, rivalries and disgruntled non-family employees? How and why do you hire or fire family? And, most importantly, when, how and to whom do you hand over the reins?
Ask a founding entrepreneur why they started their business and the answer likely will be: ‘To build something for my family.’ The American Dream of launching your own business often includes keeping the family together through that business’ birth and growth. And it may provide a comfortable living for generations to come.
But the challenges of family in a family business can make that journey a rough one – even disastrous – on both a business and personal level. Still, family-owned businesses are the bulwark of the American economy. The Wall Street Journal reports that family-controlled businesses are responsible for 59% of all employment and 78% of all new jobs. Some 80% of the companies in North America are family firms or one size or another.
Mixing Family and Business
Family can be one of the biggest challenges a business will face. Main problems are how to mix love for family with fairness to all staff, and how to resolve family conflicts within the business. The result may be a disgruntled staff plus rivalry within the family.
But the beauty of a family business, experts contend, is that your personal values – and those of your family – shape the company’s culture, often an attraction to customers.
For this article, we interviewed several experts. Information on how to contact some of them is on our Web site at www.tirereview.com.
Pros and Cons
An important question to our experts was: What are the pros and cons of the family business? Generally, all agreed that the family firm offers the advantage of a closer relationship with family members and provides them with growth opportunities. Greater loyalty from customers also is likely because they relish dealing with the owner/boss of the family.
Another advantage of the family business can be more agility and less bureaucracy in management. Dad or Mom or Son or Daughter may quickly say Yea or Nay rather than taking it to a board for a vote.
Drawbacks are as plentiful. Unfortunately family members often expect they will have a job no matter what, feel impervious to business rules, and assume the same roles in the business that they do in the family. There’s a carry-over of personalities and emotions. And, even worse, a feeling of entitlement among family members.
Management consultant Quentin Fleming finds that families tend to bring from home their patterns of relating to each other. This may recreate the family hierarchy within the firm even though the business has different needs than the family.
Even though every case is indeed different, how to develop family in the business draws some unanimous comment from our experts. All of them point to the danger of an older generation holding onto authority too long and suffocating the younger generation. Elders may refuse to allow some of the mistakes necessary in any learning process.
And too often a job is designed to bring a relative on board rather than having each job described in detail and then matching the relative to that position. ‘Clarify business roles and responsibilities based on positions, not people,’ urges Kim Schneider of Schneider Consulting Groups in Denver.
Outside Experience First
Preferably before signing on, family members will have acquired outside experience, perhaps working for another company in the same field. Some family firms require two years of such hard knocks elsewhere before taking on a relative. This especially important if the family member is a likely candidate to take over the business in the future.
There’s nothing like working for someone other than Dad or Mom to learn humility, respect and responsibility. An added plus would be the respect of other staffers for having paid some dues before joining the family business.
At the same time, it should never be a given that family members will be hired. Some simply won’t/don’t make good additions and would be better served working elsewhere. Some experts suggest subjecting interested family members to the same interview process you’d use for any other employee. Spell out the business and the tasks, find out if they are up to it, and make the decision.
Early Preparation at Home
Joseph Astrachan, of the Family Firm Institute in Boston, stresses the importance of preparing a son or daughter at an early age, teaching the value of hard work, money and personal responsibility long before being hired. Short family meetings are recommended to set goals for homework or chores, etc.
If you have a daughter, better treat her like a son in regard to your business. While less likely than sons to join your business, even today, daughters are stepping up the pace. And they resent having to ask to become part of the company while a son may have been invited. Equal consideration is best.
And in developing a family employee, there should be a career time-line established. Goals and positions should be specified for every two-year period, according to Paul Karofsky, executive director of the Northeastern University Center for Family Business in Dedham, Mass. As with other employees, it’s often best for family members to be assigned a mentor to monitor individual work progress, Karofsky adds.
What about fairness, and does this require treating family like everyone else? Well, yes and no. Yes, the experts agree, family is to be paid for the job and performance on equal terms with all employees. However, special compensation is okay, provided it is as a bonus or part of an ownership incentive program and not a regular part of the pay package.
One way to assure fairness is to make sure everyone, family and staff alike, knows the rules of operation and what is expected of them. At home, families may not need written guidelines to operate; family businesses do. Especially those with multiple family members involved.
One key to family business success is having clear lines of authority, and equally clear business rules and processes. No one can plead ignorance if everything is explained. Non-family staff, too, will appreciate there being clear lines of authority; no one wants to deal with contradictory orders, mixed sets of expectations, or attempts by one family member to undercut another.
Everyone must be made aware of required basic business behavior, and don’t extend special privileges or tolerate behavior you wouldn’t accept from a non-family employee. No coming in late, leaving early or taking off without notice. What’s good for the goose, in this case the staff, is good for the gander, the family.
Same Last Name No Excuse
Just because an employee has the same last name as the owner does not avoid necessary performance reviews. Family members need that review just as much as other employees – if not more so – to realize whether the required level of performance is being achieved.
Firing any employee is hard. It’s even worse when it comes to family, but sometimes it has to be done for the good of the business and the sanity of the family structure.
If a family member’s performance is questionable, some experts recommend hiring an outside consultant to review the situation and provide an outside perspective. Maybe the problems aren’t caused by the family member, but rather perceived expectations or other dynamics. If it is a real issue, and firing is the only alternative, the third-party perspective can help support the decision and ease your mind.
Still, firing is firing, and you can expect a certain resentment from other kin. On the other hand, your business could be better for it.
Stay Same With Perks and Pay
Apply the same rules for perks as you have for other employees. Actually, when you apply rules equally you’ll become more perceptive of needs for all employees.
And the fairness list goes on – same discount on merchandise, same vacation, all the same throughout the firm. The worst example a family member can set for others is to dip into the cash register like it was the cookie jar at home.
What about pay? Astrachan urges that all employees be advised clearly up front what to expect in way of compensation. And family members, at least initially, should be paid at the same level as other employees.
Report to Non-Family Member
Who to answer to? Experts are quite firm on that point. Karofsky says wherever practical, family members should report to non-family members. And you will need to stay out of the way and let that non-family member manage. Not only will this help training-wise, it will also establish a sense of respect for others on the company team.
Conversely, employees can contribute valuable ideas for the business if they know the path is not blocked by family members, another benefit of having family report to non-family. Employee concerns, comments and criticisms will be forthcoming provided they are encouraged to share them, says Karofsky.
On the other hand, lack of communication caused by family-overload can sap morale and prompt good employees to leave for jobs where they will be heard and appreciated. One way to open up communications is to invite any employee with suggestions to attend relevant meetings of managers and supervisors.
When Conflicts Strike
Inevitably conflicts in the family business will arise from family relationships. ‘Trouble with kin is the cause of most family-business demise,’ states Astrachan. He reports that close family communication often is the key to resolving such conflict. Conflict should be addressed as soon as it appears and not be allowed to fester.
Karofsky and Schneider suggest forming a family council to keep communications open and help resolve conflict. The family council also can monitor business progress. But Astrachan says a professional evaluator can best determine whether the business is being run well and in accordance with the family’s wishes and values.
Many family companies hold regular weekly family-only meetings to go over business and hash out conflicts. Other options for regular business-family meetings, including stakeholders and not just workers, also is recommended, preferably weekly.
However, the fact is that fewer than 10% of family businesses have such meetings, most fearing that their business may turn into a democracy.
Best advice of all, however, is don’t bring work home and don’t bring home to work. Problems in one should not become problems in the other. Family gatherings should be kept as business-free as possible, and little business time should be devoted to family matters.
Turning Your Baby Over
‘Nobody knows this business inside and out like I do. There’s no way anyone else can take over.’ That attitude has harpooned many a family business, especially when it comes to finding and teaching a successor.
Keeping the family in the family business requires succession planning and training, and the right attitude. Otherwise the company probably will never survive through the second generation (two of three do not), according to the Center for Applied Research at the University of Pennsylvania. Of those second generation businesses, only 15% reach the third generation.
The good news is that a lot of help is available. Many universities have special departments on the subject, and there are scores of books on the subject. Plus there are numerous succession professionals, including your attorney, accountant and insurance representative.
But there are three pieces of bad news: succession planning can never start too soon, it will be a long and complicated process that will require professional help, and you will have to make some hard decisions as to whom in your family – if anyone – gets the keys to your business kingdom.
No Snap Decisions
Experts recommend strategic succession planning rather than a sudden decision on the way back from the founder’s funeral. That planning might begin with a family mission statement, a written commitment to continue the business through successive generations.
The first planning step is to determine who will be the successor or successors. There may be a big difference between who will own the company and who will manage it. Barring a sudden catastrophe, both of these selections should be made long before the founder retires or dies.
Deciding who will manage could be easy. Successor candidates often have spent years in the business, working up one level at a time and demonstrating their capabilities. But choosing who will own your business may be harder, depending on family member interest or capability in taking over, or what the family’s interest is in continuing ownership.
It’s never too early for grooming the heir, but the worst policy is for you to say: ‘Be quiet, watch and you’ll learn.’ There must be a training-for-succession plan. This may involve sending the heir to attend business seminars and forums, and certainly taking advantage of educational opportunities offered throughout the tire industry. Within the business, the faculty for education should include not just the present owner-manager but also your accountant, attorney and any consultants.
Some small business owners start their succession planning before their business even opens. It may be helpful to build your business with strength and leadership that isn’t dependent on you. That will allow strong and talented management to emerge, assure consistency in the business when it’s time to retire, and you may even find/develop a successor along the way.
Despite the desires of potential heirs, the new leader should be the most capable candidate, family member or not. This may require hiring an interim non-family CEO, allowing the heir time for the necessary training and experience to qualify for the mantle. Or, it could mean finding a permanent outside leader, even to the point of selling off your business.
Bringing your successor in from the outside also brings challenges. Finding and teaching the right person will be tough enough, but you may also experience resentment from existing staff who were passed over. These employees must be part of the team in order for the business to succeed, and a lot of work will have to go into soothing their feelings and motivating them. The politics and problems involved with choosing and preparing a successor – family or not – are difficult and complex. The best advice is to start studying the topic early and thoroughly.
Whether family or non-family, criteria for leadership succession needs to be established early in the planning. Such criteria should include education, experience and style of leadership and management. Look for financial abilities, understanding of money matters, technical knowledge and expertise, and negotiating abilities (see accompanying story).
Start Plan by Age 55
Succession planning should begin around the dinner table. At age 50 or certainly by 55, the founder should begin planning ahead for the eventual surrender of the helm. Starting such a plan after age 65 is extremely difficult and potentially disastrous.
Spend time talking with your family and get their input. Find out what their goals and desires are, and what they want from the future. You may be surprised by what you hear; too often children feel ‘forced’ into working in a family business, when their real desires lie elsewhere. Likewise, they may feel ‘obligated’ to take over the helm, when, in truth, they’d rather not.
The best candidate is the person best suited to help the company grow and remain viable, not necessarily the first-born or any of your children.
Once selection is made, make it absolutely clear who will take over, and work to support that decision. And the owner must get all the legal documentation and any sale agreement together to facilitate the eventual transfer of power.
Valuing a Family Business
Whether you give the business to your heirs or, more likely, sell it to your offspring or other relatives, the next step is to have an expert evaluation made of the business’s worth. This will help in computing tax liability whether sold or gifted. A tax attorney can guide you through the maze of estate tax laws. Any succession plan must comply with the tax code.
To value the business you need a formal appraisal. There are three basic types: income, market and asset-based (cost). Income appraisals are based on expected future earnings. Market value is determined by prices paid to acquire similar businesses. And asset-based is the value of underlying tangible assets, but not goodwill and other intangibles.
Another key reason to start succession planning early is avoiding the ‘death tax.’ Estate taxes can literally kill off even the most successful business. Though federal estate taxes are currently being reduced, state estate taxes aren’t being cut and can often be more brutal. Avoiding crippling estate taxes should be a prime goal in succession planning.
If you lack an interested successor, you may even opt to sell your company to someone else. This can be a most difficult decision, but your business is an asset that can bring financial peace-of-mind to you and your family. It’s important to treat your business as a business, not get overly sentimental, and remember that selling the family business does not make you or it a failure.
Hanging On Too Long
Too often a parent hangs on beyond an announced retirement date in fear that the son or daughter doesn’t really know how to run the business after all. This is a major cause of unnecessary friction. Worse yet, the founder decides a year or two later that a come-back is in order. This is the worst of all scenarios and usually results in making a bad situation impossible.
Of course it’s tough to pry the reins out of the hands of the founder who has been more mother than father to the business. Letting a business go is a difficult as saying goodbye to a child.
But you have to let go. Hanging on too long – or making a comeback – will only foster resentment, cause added hardship for your successor, and could cause damage to the business and the reputation of its current management.
Handing Over the Keys
So you now have decided who will succeed you and have trained the successor, valued the business and got a plan in place. So when is it time to trust your baby to your baby? Some experts urge: Better sooner than later.
Ultimately you are the best judge of when to pass the baton. But do decide ahead of time, announce the date and stick to it. Then toughen up and look on the bright side. This is going to be better in many ways than when you were running the business.
Now you can stop smell the roses instead of sniffing out troubles in your business.
Success in Succession Depends on Both Current and Future Leadership
I find a lot of opportunities to talk about ‘successful succession’ because the prospects and processes of keeping a family business under the next generation’s management is a high priority of most families in business.
Successful succession requires analysis, planning, identifying successor candidates, training them, and guiding both their integration into the business and their growth into its leadership. It’s a crucial, demanding and often stressful stage in the life of the business and the family. The senior owner is usually the one who makes succession or breaks it.
But there’s a player in the succession drama who deserves attention, and that’s the ‘successful successor.’ The person who moves into the leadership of any family business – whether they are family or an outsider – should possess some very special abilities and qualities. Here are a few of them.
On top of that, a successful successor understands the business inside and out, has a feel for what makes it work well, and knows where it stands in its community and its market. Understanding the family business is essential to keeping that business alive and growing.
But along with ability, the successful successor needs the temperament for family business leadership. That includes a cool head in tough situations, a willingness to listen before talking, and a certain kind of selflessness that keeps business interests ahead of personal interests. The temperament for leadership can be cultivated but not taught.
The successful successor realizes that bridging that gap is part of the job, accepts it and works very hard to carry it out.
Even when the ownership transfer is a straight market value sale between generations, the successful successor treats the company and their position in it as a trust. The successful successor takes on authority and responsibility, and also a debt of honor to his/her predecessors, others of his generation and family generations of the future.
James Lea is a family business management and succession planning advisor who can be contacted at [email protected].
A Lot of Help Available
Numerous books, Web sites, institutes and consultants are available to help any dealer work through family business issues and succession planning. Here are just a few: