Family businesses pay an estimated 65 percent of the wages in the United States and account for almost half the gross national product. Eighty percent of new jobs in this country are dependent on family businesses. And, while often portrayed as “mom and pop” shops, family-owned businesses actually comprise about one-third of Fortune 500 corporations.
Successful family businesses, passed on like keepsakes from generation to generation, are the backbone of American commerce. Yet, according to the Family Business Foundation, a not-for-profit organization in New York City that provides an educational resource to these companies, barely more than 10 percent survive past the third generation.
What’s the Problem?
Too often, family issues spill over into the business, draining the emotion and the lifeblood (profit) out of the business, and creating a strain on the family. Although more than 70 percent of the average family’s wealth is tied up in its business, many family members never believe the gravy train could come to a screeching halt.
And when the family business falls on difficult financial times, all too often entire families are caught in an emotional maelstrom that pits sibling against sibling, cousin vs. cousin, or one generation against another.
Running a business – any business – is a difficult task. Running a family business requires a CEO who can manage the business as well as the family issues. The right decisions must be made to keep the business competitive and profitable in a dynamic marketplace.
The right decisions also need to be made to keep the family on sound footing and its members harmonious. Companies need to show the value of their product or service to their customers or face the consequences. And families in the business must learn to separate family issues from business issues, or face the consequences.
The most common factors causing the death or disability of a family business are problems resulting from the three C’s: competence, compensation and contribution. Too often, family members fall under the false assumption that the ability to run a business is an inherited trait.
And, they mistake the family business for the family piggy bank. Finally, they wrongly believe that working in the family business is safe and secure and they can follow their own rules and not be judged by their performance.
These three reasons, alone or in concert, are why the families in nearly nine of every 10 family businesses either sell (if they are lucky) or see the company fail before the torch has been passed from the third generation.
A Tale of Two Companies
Consider one family business, which once upon a time was a top-quality manufacturer and among the leaders in its industry. During its first 35 years, it grew in volume and generated strong profits that allowed two families to prosper.
The transition to the second generation went smoothly. The CEO (a son-in-law of the founder) became a capable, effective leader for many years.
However, as time went on, more and more family members entered the business, and issues of competence, compensation and contribution started to rear their ugly heads. The successor to the second-generation CEO was neither competent nor interested in the job – although he enjoyed the lifestyle it afforded him.
Other third-generation family members contributed little, yet were handsomely compensated. A very negative culture developed and the financial strength of the company weakened.
The third generation did not have the capabilities or the resources to deal with the business issues, and within three years of their assuming the mantle, the company filed under Chapter 7. As a result, 400 jobs disappeared and the family lost its primary cash-generating asset.
Contrast this to another family business, a thriving 120-year-old construction company run by fourth-generation family members. Each family member has a job based on skills and contribution, not bloodlines.
The business compensates its employees based on performance, rather than heredity, and family members who do not work in the business only benefit as shareholders or heirs. In this case, the third generation recognized that for the family to benefit long term from the business, the asset had to be secured first – without regard to the feelings of each and every family member.
What was the primary difference between these two companies? That’s simple. It comes down to setting priorities – whether the needs of the business or the family will take precedence.
Of course, it takes a strong leader to separate out family issues and face the likelihood of confrontations with children, spouses, parents, siblings, nieces and nephews, cousins, in-laws and so on. Just as in a non-family business, not everyone can be given the same responsibilities, or receive the same financial benefits – and no one should assume that they are guaranteed a job.
What can you do to prevent family issues from affecting your business? Begin by taking the following steps:
- Create a board of advisors with a blend of family and non-family members who have proven track records in business. Have management report to the board quarterly on strategy, growth and profits.
- Draw up a compensation plan for working family members, as well as the entire company, that gives bonuses based on personal performance goals and aligns base salaries with responsibilities. Judge everyone based on performance, not bloodlines.
- Establish a policy that family members who do not work in the business don’t get paid (without exception) and that pay is based on contribution.
- Identify your top management positions and develop a job description for each, including skills and responsibilities. Make sure the individuals filling each position have the capabilities to excel at their job and are interested in their work. Make sure the management team is competent even if it means you must augment family management with non-family management to ensure total management talent is in place to operate and grow the business profitably. Remember, profits equals cash equals family (shareholder) value.
- Identify family members for each key management position at least five years before they have to assume that position and establish a comprehensive training and mentoring program for each. If they are unwilling to learn, then find someone else.
- Devise a scorecard that clearly shows the financial health of the company and hold quarterly family meetings to review it and answer questions. Teach every family member, whether or not they are in the business, what the scorecard means and how to understand the metrics.
- Develop a five-year strategic plan for the business that is updated annually so there is an agreed-upon operating plan that the family signs off on, and which has the management team’s commitment.
- Have the board of advisors perform annual job performance evaluations for every family member in the business.
These guidelines will help lift the thick fog that exists in so many family businesses. It may take time as well as courage to implement each of these steps, but it will force family members to deal with issues systematically, rather than emotionally.
A family business needs to be run as professionally as any other business – without family issues and relationships clouding and draining the bottom line.
Family businesses might want to explore the resources of the Family Business Foundation. The organization sponsors workshops, in-depth studies and publications to help family business owners learn how to develop strategies and overcome obstacles.