How to handle the unique risks of family businesses Featured

10:40am EDT November 1, 2012
How to handle the unique risks of family businesses

Family businesses typically enjoy employee loyalty and deep-seated pride because the family and the business are one and the same. However, with those advantages come certain risks.

“I tell people often, family business is the best and the worst form of business,” says Jonathan Theders, president of Clark-Theders Insurance Agency Inc. “You’ll do anything for family. It’s always amazing to me how family businesses aren’t run like typical businesses.”

Theders says 90 percent of the businesses in the U.S. are family businesses — a massive segment of the economy.

Smart Business spoke with Theders about the unique risks these businesses face and how to mitigate them.

What unique risks do family businesses have to consider?

One is an informal or complete lack of company policies or business plans. You should document your responsibilities and expectations for each family member in a family charter, but it is rarely done. It might be called an employee handbook in a typical business. If someone doesn’t perform in a regular business, you remove him or her, but it’s hard to do that with a family member.

At the end of the day in a typical business, the employees go home. But you can’t always separate the family business from the family. On holidays or birthdays, it is still business. You also know more of what’s going on in their personal lives than you would know with regular employees, which can pose challenges.

The majority of a family’s assets are tied up in the family business. Everything links to it, and it’s the source of all good and frustration. Divorce, illness and financial hardship normally create productivity issues for employees, but in a family business, it’s more complicated. You have to consider who owns shares of the company and the valuation of those shares. Maybe the business was worth $100,000 when the founder got married, but now it is worth $1 million and a soon-to-be ex-spouse is entitled to half of it. Where is that half million coming from? It’s probably coming from the sale of the business because the founder doesn’t have half a million in cash to pay off the divorced spouse.

If you have HR policies and procedures for general staff for sick days, absenteeism, behavior and dress and a family member is not adhering to those same standards, it also creates problems.

How do you handle special treatment concerns?

You have to be extremely cognizant of how you treat and compensate family and non-family employees. Make sure you are consistently selecting the most qualified individuals to fill roles in the company. This is a huge problem, because most of the time companies fill holes with family members that are not performing as well and other employees subsidize that. Take the family aspect out of it, and it could be easier to have the right people on the right seat on the bus.

How can you mitigate the risk of unhappy employees who are also family members?

If a normal business’s goals don’t match up with an employee’s personal goals, that employee can find a new job. It’s not as easy in a family business. It’s difficult to tell a parent you’re leaving or tell a child, ‘You’re not right for the business.’

That added family dynamic makes failure much more intense, and why it’s important to devise a plan that balances the family goals and business goals. For example, one family business had 70 employees; 36 were family members. The matriarch mom believed everybody with the same last name should be compensated equally whether they were pushing a broom or the president of company. That causes major problems when you have such differences in roles and responsibilities and abilities. Everybody wants mom’s wish to be true, but it doesn’t make good business sense.

How can you stop family conflicts from bleeding over into the business?

The adage ‘Leave your personal problems at the door’ doesn’t apply in a family business. It’s too difficult to separate family and business conflicts.

There’s a lot of sibling, and even cousin, rivalry. You grew up fighting for the last piece of chicken or the last point on the basketball court, and it continues on when you come into the business.

It’s unrealistic to believe that all family conflict can be removed from business, but you have to work harder at establishing those boundaries. Understand the potential family conflicts that can come up and try to address them ahead of time.

Family decisions are often extremely emotional and irrational. One recommendation is family council meetings that encourage members to get together and talk about where the business is, estate planning and other long-term issues. A third-party moderator often needs to be involved because it is so emotional. Another way is involve your board of directors or advisers, which brings an objective view to company performance and future strategy.

How are the transition risks different in family businesses?

The failure rate of businesses moving to the second generation is very high. Statistics show that 85 percent of family businesses don’t make it to the third generation. That’s often because the first generation has trouble letting go or hasn’t prepared the second generation to take it to the next level.

Often, family business owners do not have succession plans or an exit strategy. At 70 or 80 years old their entire personality, their every breath is related to the company; they’ve put 40 to 50 years in, through hard times and good times. They don’t know how to get out, but they are not the ones to lead it into the future.

Jonathan Theders is president of Clark-Theders Insurance Agency Inc. Reach him at (513) 779-2800 or jtheders@ctia.com.

Insights Business Insurance is brought to you by Clark-Theders Insurance Agency Inc.