Family Business…The Business Must Come First!
Over the course of my career, I have both worked as an employee in, and consulted with, a large number of family businesses. Although each situation is unique, the stories are similar in terms of what works and what doesn’t when family dynamics are involved in running a business. Before we consider the best practices of successful family businesses, let me first share a story with you about one experience I had with a client. Let’s call the company Family Busters, Inc.
Family Busters, Inc. was a 2nd generation family business that was passed down from two brothers to four of their children, two from each family. The brothers had grown the business heavily concentrated with one customer, adapting their products and services to meet their specific needs . In fact, at one point, the business had over 75% concentration with that one customer (that’s another story!).
After the two brothers developed health issues, they brought in the four children to begin taking things over. At the time this occurred, only one of the children had experience working elsewhere, while the three others had worked in the business from early on. They were all in their mid-20’s to early thirties. Only one of the children had gone on to achieve a 4 year degree, and the others had some technical school training.
It was a couple years after the business had been purchased from the 1st generation when I was engaged as a consultant. I found the business had been overvalued, as the valuation and sale were done by a family friend. The children had each become 25% shareholders and were paid equally, as was determined by the 1st generation, even though they each had very different roles and decision making authority within the business. Yet, it was clear that only one of them had the capabilities to be President, and the others were qualified for lower level functional roles within the organization. Are you starting to get a sense of the conflict that was stirring?
Let's review: Two families, two children from each (one from a second marriage), plus a husband of one of the children - all involved in the business. The 1st generation was also still involved, as they were being paid out on long-term notes for the business and the land. Family Busters, Inc. was struggling. They had heavy concentration in one customer, all the children were taking home way too much income for the positions they held, except for the President, who was underpaid. Remember, these individuals were put in these positions because they were family, not because they were qualified to take on the roles they were put in.
I know this sounds like a soap opera, but unfortunately this story is not atypical of many family businesses. In fact, as the business passes on to multiple generations, this becomes more and more the case, as entitlement, rather than capability and performance, drive behaviors and decision making.
So, let’s evaluate what happened with Family Busters, Inc. to cause the focus to be on the family and not on the business.
The 1st generation didn’t address the needs of the business prior to bringing in their children.
The capabilities of the children were not matched with the needs of the business, and thus they were put in positions they weren’t equipped to perform.
Compensation was not paid commensurate with education, experience and role.
The role of owner was not separated from that of employee. Meaning, the roles and responsibilities held within the organization, and the pay received for those roles, was not separated from the benefits received as a shareholder.
The children were brought into the business with little to no outside experience. With this narrow perspective, their decision-making abilities were limited to only what they’d learned at Family Busters. It also limited their ability to grow beyond where they were and thus build the business for the future.
The children were entitled in their attitude and approach to the company based on how they were brought into the business and how they were compensated.
Cold as it may sound, the business must come first if you want to be successful.
What are some things that you can do to build, and pass on, a successful family business?
Require that family members get some experience outside of the family business. This not only brings new and fresh ideas, but also expands their resources from which to pull from in terms of decision making.
Hire and compensate family for the role they play within the organization. Ex. Don’t pay $100,000 for a payroll clerk.
Separate the role of employee and owner. The role you play as an employee should follow the same expectations, behaviors, and reporting structure as anyone else in the business. Ex. Don’t allow the shipping and receiving clerk, a family member, to go to the President, another family member, to cover for them because they have to leave early for the day. That wouldn’t happen in any other business.
Each role should be well-defined, and the boundaries respected.
Establish boundaries between work and home. Leave work at work and keep family time separate.
Family businesses can and do succeed generation to generation, but the success of the business has to come first. If the perspective is taken that the success of the business provides long-term financial security for the current and future generations, then the business can be run more like a business. If the business is run on the foundation that it should provide employment to all family members, then the likelihood of success is at risk.
Jayne McQuillan, CPA, MBA, CEPA is the owner of Journey Consulting, LLC