Issues in A Family-Owned Business

Your family business is not just any job. It started because of a dream — and that dream became a labor of love. Most family-owned business owners feel more secure running their own business than being employed in an uncertain corporate world. My husband’s Uncle Chris, who owns a manufacturing company, once told me, “I had been an employee of a corporation for twenty years and was shocked to find out at age 36 that nobody gives a damn about anyone else in a corporation.” Well, wouldn’t you agree with me that being the leader of your family business is quite satisfying?

Let me make a few assumptions about you, the family business owner. You may have just started your own business or you may have had this business for some period of time. You most likely identified a niche that you could develop without competing with publicly-held corporations in the initial stages of your growth. Your business probably has at least 50% of the ownership and management within the family — whether related by blood or marriage.

Interviews with many family business owners through the years reveal that — family members who were employed in the business tend to be more committed and loyal; they like being able to tap quickly into the resources of family members, financially or for labor; and they feel they outperform non-family-owned businesses in terms of customer loyalty and service. Publicly traded companies cannot afford to do any strategic planning according to family principles, right? Family-owned businesses can. They make decisions that interplay with what the family believes in — how their employees and customers should be treated.

According to a survey done by Arthur Andersen/Mass Mutual American Family Business Survey (1997), family-owned U.S. businesses represent 50% of our gross national product (GNP) and employ over 65% of America’s working population. About 43% of the nation’s 10 million-plus family businesses are expected to change leadership in the next four years and between 2000 and 2020, $6.8 trillion will pass to the next generation.

Various statistical data in the past ten years reflect recurring challenges: the obstacles a family-owned business must overcome. Only a third of family businesses make it through a second generation, and only a third of those make it through a third generation. According to the 1993 Gallup survey, only about half the business owners who say they want an heir to take over the business have actually appointed a successor. Fewer than 25% have a formal, written succession plan. As a result, the children don’t know what their roles are in a family-owned business. Topics like retirement, death, and estate planning are sensitive, yet important since escalating estate taxes can damage a family business. Questions about family conflicts, family business compensation, and professional management issues are sometimes placed in the back burner, and acted upon — just before an eminent disaster.

That’s the jumbled picture. Here is how I, veteran of many life-altering triumphs and mistakes in my own family-owned business, think we should tackle some of these issues.

Three issues exist — family relationships, management, and planning.

• Family Relationships. This can make or break a family business. Families have a shared identity, shared history, shared language, and common interests. How does a family function smoothly in a business? Look at the parent who consciously or subconsciously plays favorites by giving more shares to the oldest son, expecting him to be the successor while neglecting a daughter’s professional growth. Or let’s understand why some business owners prefer that their children work in corporations before joining the family business because they believe that humility begets better leaders and outside experience means significant contributions.

Adopt a family code of conduct. Think about this when there is sibling rivalry, for instance. Here’s an excerpt from a family mission statement moving into its fourth generation of shared business ownership:

“Our family is fortunate to have as members people of differing personalities, skills, motivations and goals. Our diversity gives us strength, fosters creativity and permits various kinds of contributions. Despite any differences, we commit ourselves to each other. We will support each other and respond to family members’ needs. We realize that conflicts will occur, but commit to compromise, planning, communication and love as to limit any injury conflict may cause. Conflicts will be less destructive if we maintain flexibility and openness to change. We will listen respectfully to all, young and old.”

Hold family meetings regularly. What’s this? Yes, there are family members who are inactive in the business and do not belong to the board of directors or the family management team. Family meetings are meant to exude an energy all its own, assigning project leaders to develop creative ideas, educational or charitable projects, mission statements, scholarship funds, or family genealogy projects. The goal is to keep the family strong. If there is a strong family, there is a strong business. If there is family unity, it follows that any business issue can be resolved quickly, instead of going through an extended period of “going into denial.”

• Management. In the initial phase, it’s just “mom and pop.” Since you, as mom and pop, are not sure if your children will be interested in joining the business later (and secretly, you hope they will), then be contented in giving them summer jobs or after-school jobs at first. Encourage them to see the bright side of the business especially when you lose your temper.

Involve your children, yet tread lightly. My sister, Myrna, says that her children encourage her to work in their insurance business because they reap the benefits when it comes to incentive travel trips to European destinations. “They’re willing to stuff our direct mail envelopes so that they can save money for their favorite electronic toys,” she says. “Parents often think their children are learning something by osmosis about the business,” says Nancy Drozdow, principal at Center for Applied Research in Philadelphia. “They don’t think about what is appropriate development from the standpoint of management expertise. Consequently, the next generation may think they know the business, but they only see it from a worker’s perspective. They have learned how to run the ship from inside the hull, never turning the wheel.” Solution? Says Drozdow: “Train the second generation in management procedures, not just workplace mechanics. What do customers want? What is the banking relationship? How does the business work with suppliers? What relationships do you want with employees? And just how does the business make money?” Gee, I couldn’t have said this more clearly. Just don’t forget to let these children develop their own leadership styles — and make their own mistakes.

Board of Family Business Advisors (BOFA). Let’s talk about the professionalization of your business. These advisors are not your substitute active board of directors, yet every time they meet regularly to help you with your business issues, they are paid “per diem” for attending a meeting and preparing for it, just like you pay your board members. Why do you need them at any stage in your business growth – even at the start? That’s because they are experienced “outsiders” who bring fresh insights and solutions to problems that could ruin your business or your family. They understand family-owned business dynamics. Remember, when emotions run high regarding certain problems like continuing disagreements among family members, questioned motives, emotionally-charged decision making, loss of commitment to the family and/or the business, narrow-minded ways of viewing things, or analysis paralysis, you need these advisors.

Who are they? They are collaborative, no “conflict of interest” partners to your success. I don’t recommend recruiting the professionals who are already serving your business since you are already paying them for their advice. Don’t include any close friends because it will be harder for them to give objective advice. If you have just started your business, your BOFA may have only one outsider. As your business evolves, then you can include the following: accountant, attorney, banker, executive search consultant, family business consultant, marketing consultant, financial planning advisor, insurance agent, investment banker, organizational development specialist, and psychologist. Then, include the trust officer and the valuation expert when you gain substantial assets.

Family Business Compensation. This is a particularly sensitive topic. In my early family business days, I didn’t have a defined salary. Personal and business expenses were mixed in one account. I’m pretty sure that some of my siblings felt I shouldn’t be spending recklessly (business was great!) even if I felt I deserved some management pay for my hard work in the family business. What a mistake! If I could turn the clock back to those days, this is what I would do: I would decide on a philosophy of compensation. Do we pay working family members equal amounts, or do we base the compensation on a fair market value of their jobs, determined at 75% of market average? Do we offer an annual incentive plan based on personal goals and the business goals’ performance? Do we look at long-term incentive plans and establish a criteria for evaluating performance? Do we make sure that everyone knows that the compensation plan will be reviewed and refined every year to adjust to current business conditions? Your BOFA, including your accountant and/or a compensation consultant, will be invaluable in helping you with these questions.

• Planning. When you, the business owner, write a strategic plan for business growth, you are also developing the value system that will help you hurdle the ups and downs of your business, especially when it comes to relationships. Developing a team of competent employees who are both family and non-family members is crucial. My father, who was a Chief Accountant for a family-owned shipping company, recalls how he had trained the second generation Chief Executive Officer when the latter was just barely starting high school. When the current CEO’s father retired in the early 1970’s, he aggressively pursued buying larger and more passenger-friendly inter-island vessels. He was very young at that time, but with a trusted employee like my father who was around to guide him, how could he fail? In some family businesses, sometimes the successors are not ready to take over the business. This is when “interim management” comes into the picture. “This individual can help the successors develop their personal and professional plans, grooming them for positions suitable for their skills. It’s often smart to bring in an outsider for a stipulated period of time to professionalize the management structure,” says Frank S. Schneider, director of The Schneider Consulting Group in Denver. However, even if you think this may not work in your family business because you don’t want to give up family secrets, then consider your most trusted employees as your interim managers and have them work with your BOFA.

Succession Planning. First of all, as a parent, don’t assume that your children will want to work in your business. If you determine what your personal, financial, and career plans are aside from running the business, you will be able to ask your children if they would like to take part in planning the family business’s future. Sometimes, children will say that they want to run the business because they want to avoid conflict with their parents. If your children are truly motivated to take over the business, you will have happy successors. Thus, during the family meetings, involve them in your strategic planning. Invite them to specific strategy sessions with your BOFA and management team.

Retirement Planning. Now what happens if you want to retire? Have you talked to your financial planner yet? Uncle Chris, when asked how he’s living life as a “retired gentleman” ever since his son succeeded him as President and CEO, has this to say, “ I have been gifting my company stock to my children for a number of years in amounts that would have no tax consequences annually or after my demise. Retirement planning is a huge topic. We have taken several routes over the years. The present vehicle is a SEP-IRA wherein company profits are invested in a self-directed, tax-deferred, IRS-approved plan.”

Selling the business. What if you want to retire and you have to sell the business? Common sense dictates that it would be better to find someone who cares about your founding legacy. If trusted employees are interested in buying you out, you could always have an easy installment plan or even have your banker help them. If they have equity invested in your business a few years before you retire, the take-over will be much smoother. What if the buyer is a total stranger? You definitely could arrange a training period for the new owner. Or if this is an immediate sale, part of your agreement could stipulate that you remain as a consultant for a specific period of time to ensure a smooth transition. After all, you were a key player in the birth and growth of your business. You might as well give it a good send-off!

© Lorna Dietz, September 1999.