By Edward D. Hess,
Distinguished Executive in Residence and
Adjunct Professor of Management, Goizueta Graduate School of Business
Eighty percent or more of all businesses in the U.S. are family controlled. Over 50% of the work force works for a family business. Family involvement in a business adds an additional layer of complexity to the customary challenges facing business builders. There are books and articles which deal with the common family business issues of nepotism, succession, and equitable treatment of family members not in the business. Today, I want to share with you three lessons I have learned over the years in working with many family businesses:
- Rule #1 – Do not kill the Golden Goose;
- An entrepreneurial management style will not work with family issues; and
- Everyone needs their own sandbox.
I. Do Not Kill the Golden Goose
Building a successful family business is hard. Successfully passing it along to future generations is even harder. In fact, 70% of all family businesses do not successfully make the transition to the second generation.
Difficult emotional issues arise in all family businesses: issues involving employment of family members, compensation of family members, equity amongst siblings, the cash needs of family owners not employed in the business, in-law issues, succession choices, and as importantly, the effect of all of the above on non-family employees and managers. Family issues are like waves in the ocean. They keep coming and coming and coming. As family members age, their perspective, needs, and views of the business change. These changes interact with changes in the business to produce a nice unique gumbo of issues for every family business. Issues, which if ignored, can kill prematurely the golden goose.
A family business which produces enough profits to support many members of a family is a unique treasure and blessing to be appreciated by all. All family members need to understand what they have and how fragile it may be – not only do you have the risk of business factors but you also have the risk of family factors which can kill the golden goose. Family members need to be made aware and sensitive to how they, yes, they can destroy the business as easily as the competition unless they learn to communicate and work through family issues.
Every family member that “feeds at the family business trough” has the duty and responsibility to understand the uniqueness and goodness of what exists and further has the responsibility not to hurt the business or cause serious strife out of personal self-interest. The good of the whole outweighs the greed, selfishness, or ego of the one. Pure and simple, paraphrasing General Douglas McArthur – duty, honor, and family. Family leaders have the obligation to educate family members about the realities and risks to the business from outside the family and from within the family. The family has to agree on certain inviolate values which all can ascribe to. These overriding values will help family members deal with business issues and family issues as they arise. Families need to meet and discuss values and goals, and reach understandings about those values and goals for both the business and the family.
II. A Different Management Style is needed for Family Issues
Managing family issues is different than managing business issues. Non-family member employees are easier to talk to, persuade, and direct than family members. You can be more objective about non-family members and issues. The common entrepreneurial management styles and process of quick decisions and taking charge does not work well with family issues.
The emotional aspects of family impacts decision making, impacts communication directness and honesty, and the carryover of family issues to the home – and in some cases, to the bedroom – make it impossible to leave family business issues at the proverbial office. The emotional complexity comes not only from the participants’ emotional baggage but also involves spouses, parents, and siblings. Every family has issues. Every individual has family emotional “baggage”. Accept those realities and manage them.
An autocratic, quick decision making, handle-it-once-and-for-all entrepreneurial mentality does not work well with family issues. A different style and process is needed to lessen the risk of family issues destroying the business. And this different management style is hard for entrepreneurs to adopt successfully. It is contrary to their demeanor and way of operating. It is a style of openness, communication, listening, being empathetic, and having a forum or process of allowing all of the family emotions to be vented, heard, and discussed with resulting compromises again, again, and again. Family leaders need patience, listening skills, and dispute resolution skills. Or, they need to bring in a facilitator.
Listening, giving people the opportunity to be heard, and having a process whereby family members are educated about the realities of business is critical to managing the family. The process is as important as the results. Reaching the quick bottom line results does not work well in this arena. People have to go through their own process of dealing with their respective needs and wants relative to the family and the business. It is constantly evolving and never ending.
Family councils, family constitutions, and frequent family meetings do and can work to mitigate against the risk of killing the golden goose if and only if you have a process that is values driven and the family understands its duties and responsibilities toward the whole not just me, me, me. To do this takes time, emotional effort, listening, compromise and leadership. Remember – you ignore family issues at your peril; they do not go away. You have to manage family issues differently and with a different style and mental framework than business issues.
III. Everyone Needs Their own Sandbox
Many family businesses dissolve or split up because “everyone needs their own sandbox.” Siblings or cousins want to show themselves and others they can make it on their own or they want control of what and how their money is spent. And so, you need to plan how to address this need for individual sandboxes. There are different ways that I have seen work:
- Business Structure – Structure the business so that different siblings (assuming qualifications and training – remember the golden goose) have “their own sandbox” within the business whether that be a function, a location, or a product that they are responsible for. Give people the opportunity to be independent with specific non-shared responsibilities. Give them the burden of responsibility and leadership.
- A Separate Investment Vehicle – Another alternative is to give certain family members their own sandbox in the form of a family investment or a venture capital vehicle separate from the business.
- Separate Toys – Another alternative is to give each family member a meaningful amount of assets over which they have sole investment or spending control.
- Invest in Them – Lastly, the business can invest in a new business of a family member either directly or indirectly through the purchase of services or products. I have seen this work well with in-law issues.
All four of these alternatives attempt to deal with individuals’ need for autonomy and their need to prove to themselves and to others that they are worthy and good. In some cases, it is not the direct family member driving the needs or stirring the pot; it is the daughter-in-law or son-in-law. As stated above, an education process is a necessity for new family members – family values and the common good must trump individual greed and ego.
You family business is your own unique multi-variant set of issues. Recognize that you have to spend time managing family issues, too. Good luck with your gumbo and remember rule #1 – Do not let family issues kill the golden goose.