Family businesses are an important part of the economy, and running one comes with unique challenges and rewards.
There is no team more natural than a family, and successful business owners often inculcate a spirit of entrepreneurship in their children. Ideally, the vicious office politics of the corporate world are diminished because everyone has a bigger emotional and economic stake in making sure things work out. Working with family means more emotional honesty, more tears, more laughter, and more freedom. This stems from the deep bonds of trust that unite everyone. Ultimately, what sets family businesses apart is the chance to work on something enduring with people you love. In this article, we will analyze the conditions under which a family business can thrive.
It is hard to overstate the importance of family businesses. SCORE found that they make up 19% of small businesses in the United States, employ 60% of the workforce, and generate 64% of the GDP. Important as they are, running them comes with specific challenges and opportunities. For one thing, you cannot quit your family.
The biggest challenges family businesses face are due to intra-family dynamics: the family history, the joys and traumas, and the relationships that define a family. Trust, love, and affection are the foundations of success; resentment, jealousy, and rivalry can destroy the business.
These intra-family dynamics add a layer of complexity to decisions around human relations and what ideas are supported. For example, whereas bad performance might be enough to fire or demote an employee in a non-family business, in a family business, such decisions carry more emotion and consequences outside the business that make firing or demoting a family member very difficult.
As the shareholder group is a family and not a set of institutions, many decisions are governed by values that are foreign to a non-family business. For example, a father might hire his son even if there are more qualified candidates out there, because that father wants to build something with his son. Business problems must not carry over into family settings. Family and non-family members must be held to the same standards, and this must be made clear from day one. [Read related article: Should I Hire a Family Member?]
These dynamics affect succession planning and battles over ideas, as well as human resources questions.
Human relations in a family business
Human relations can be a minefield for a family business. There are very good reasons to hire your children, but parents often misjudge the talents of their children, overpromoting or overpaying them. A culture of nepotism can emerge, in which outsiders, no matter how qualified, cannot shine. This culture can affect the morale of non-family members within the company. It is also true that family members might be underpromoted or underpaid, leading to resentment within the family.
Many family businesses are run by siblings. We have all experienced or heard of sibling rivalry, and the emotions of this can derail a family business. Successful family businesses run by siblings are characterized by overcommunication to iron out any residual misgivings about decisions and the course of the business.
Another family business scenario is working for one's parents. This can be particularly hard because there is a monarchical sense that pervades founders that makes succession planning extremely difficult. Many founders simply do not want to leave and will not change. They identify with the business, it is their other child, and letting go is very hard. This creates generational as well as succession problems. Founders must learn to listen actively to the younger generations. MindTools lists five tools for active listening, which founders are encouraged to foster:
- Pay attention.
- Show that you are listening.
- Provide feedback.
- Defer judgment.
- Respond accordingly.
SCORE also reported that only 30% of family-owned businesses survive from the first to the second generation, and only 12% survive from the second to the third generation. Yet a whopping 47% of owners expecting to retire in the next five years do not have a successor.
Founders must decide what they want to do with the business when they retire or die. Remember, founders are not obligated to pass the family business on to their children, and their children may not want to take over the family business anyway.
If the business will be passed on to the next generation, that generation must be prepared for succession. The next generation must be involved in management of operations and informed about financial matters well in advance of succession, so they will be equipped to take over.
A family business is often a big asset, so it is important to think about death taxes. Federal estate tax exemptions are substantial, standing at $11.8 million per individual and essentially double that amount if a person is married. A number of states have death taxes, some of which diverge from the federal exemption amounts. For example, in Massachusetts and Oregon, the estate tax exemption amount is only $1 million. Consequently, the founders must prepare well in advance for the payment of state death taxes in a way that will not debilitate the business. Work with an estate planning attorney who can advise you on measures to minimize estate tax problems. The family business plan must begin with clear ideas on succession and the handling of death taxes.
If the business employs both relatives and non-relatives, it is important to set salary and benefits according to the position, not according to the relationship. Analyze the work that each person is doing and set compensation accordingly, without regard to family relations. Make it clear to all that there is a level playing field for rewards for good work. Transparency is critical; everyone should be clear on how promotion will work. It is also advisable to have your children work outside the family before working for the family business, so they have an idea of what it's like to work in the real world.
The values of the family become the values of the business. The downside of this is the creation of a "clan culture" closed to outsiders. The company's values must be made explicit to all and adapted to the marketplace so that outsiders do not feel excluded.
It is harder than ever to attract family members to the family business. Young college graduates want to work for hot startups, tech giants, or similarly exciting companies, and family businesses often fail to ignite the imagination. Family businesses are particularly risky for them because exiting the family business often has long-lasting implications for family relations and might even mean exiting the family.
The fundamental element of running a family business smoothly is in managing the family. The family must be kept united, lines of communication kept open, and family bonding exercises carried out to keep the family happy, connected, and in the same boat. Effective leaders take into account the emotional components of the family business when making decisions.