The business world is a cutthroat place. Owners need good people behind them people whom they can trust no matter what. Since good help is always hard to find, one way companies can ensure that they’re filled with trustworthy people is by keeping the business in the family.
Family-owned businesses can be great because, theoretically, family members will always be loyal and dedicated to the company. But, sometimes, family interests conflict with business interests, opening up a whole new set of business problems.
“Within the next five years, 40 percent of closely held and family-owned businesses will be changing hands and be in transition due to the baby boomers retiring,” says Carmen Bianchi, director of the EMC Business Forum of the Entrepreneurial Management Center at San Diego State University. “The keys for these closely held and family-owned businesses are having a succession plan in place and creating some kind of governance structure for the successful continuance of the ownership’s legacy.”
Smart Business spoke with Bianchi about family-owned businesses, what makes them unique and how to put a proper succession plan in place so that the business stays in the family for generations.
What are the pros and cons of a family-owned business?
Being intimately familiar with the company and its staff can be very beneficial. Having good backup and a built-in support system around you ensures you’re never going it alone. Also, usually families will be more lenient when it comes to schedules, on-the-job judgments and decisions, and mistakes. Other advantages include long-term stability, shared values, loyalty, commitment and inherent trust. Families are usually willing to sacrifice more for the business.
On the other hand, personal interactions and emotions might affect working relationships, which could lead to distractions. Decisions on how to run the business could be very different across generations, which may lead to conflict. Beware of family members feeling entitled to enter the family business. Just because someone is a member of the family doesn’t mean he or she will be a good fit for the family business. On the flip side, just because the parents love the business doesn’t mean the children will. Also, family businesses can make rapid decisions, as opposed to public companies that have to think about the shareholders.
What are common problems a family-owned business faces?
When close relatives work together, emotions often interfere with business decisions. In some family companies, control of daily operations is a problem. In others, a high turnover rate among nonfamily members is a problem. In others, growth is a problem because some of the relatives are unwilling to put profits back into the business. In the end, however, problems that the manager of a family-owned business faces are the same as those at any company. What makes it all complicated is the aspect of working with relatives you have to deal with your whole life in and out of the office.
Still, the biggest problem a family-owned business will face usually has something to do with succession planning.
What are important things to consider in succession planning?
A succession plan is as important as having an estate plan, financial plan and strategic plan. Good succession should encompass all four plans. Every family-owned business should have an exit strategy. Is your exit strategy written down or is it in your head? Are you willing to sell your company? If not, why? Could it be that your company is your legacy and that your dream is to perpetuate it through the generations? But, whose dream is it? If your successor does not have that fire in the belly, he or she won’t succeed or successfully steward the company through to the next generation. Also, primogeniture is passé the most competent person should be the successor.
Once you establish who the successors are going to be, the next stage is leadership development, where successors acquire the needed leadership skills and experience and are acknowledged by employees and clients. This will lead to a natural and seamless transition.
Finally, you should create an ‘ethical will.’ This is a tool that will communicate the most sensitive issues of succession, issues that deal with retirement, death, legacies, family values and love. These issues are then passed on through the generations.
What are some of the structures that can be put into place to promote success?
One thing is a family council: a platform where family members can voice their opinions and be heard by those who work in the business. You’ll also need a code of ethics or family creed a set of values by which a family business conducts its dayto-day business. Another structure is a family employment policy, which outlines criteria for family members in the business. Along with that, you’ll need entry and exit criteria, which are the rules and regulations on how family members enter and exit the business.
CARMEN BIANCHI is the director of the EMC Business Forum of the Entrepreneurial Management Center at San Diego State University. Reach her at firstname.lastname@example.org or (619) 594-4949.