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Looking at the vision and hard work of the founders, family businesses “take on their unique character as new members of the family enter the business. At best, the environment can be inspiring and motivating. At worst, it can result in routine business decisions becoming clouded by emotional issues.”“Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf.
The owners and managers of family businesses face many unique challenges. These challenges stem from the overlap of family and business issues and include communication, employing family and nonfamily members, professional management, employment qualifications, salaries and compensation, and succession.
Communication is important in any business, but the complexities of communication in a family business are particularly problematic. Experts say that communication is one of the most difficult parts of running a family business.Christine Lagorio, “How to Run a Family Business,” Inc., March 5, 2010, accessed October 8, 2011, www.inc.com/guides/running-family-business.html. The approach to communication needs to include commitment, the avoidance of secrecy, and an understanding of the risks of bad communication.
In a family business, it is critical that there be a commitment to communicate effectively with family and nonfamily members of the business. “Business leaders should be open about their awareness of the potential for communication issues to evolve and their willingness to accept feedback and input from all employees about opportunities for improvement and areas of concern.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed June 1, 2012, http://smallbusiness.chron.com/family-owned -business-communication-3165.html.
One important issue is whether there should be a line drawn between family and business discussions. Some suggest that setting up strict guidelines from the start that draw a clear line between the different types of discussions is a good approach.Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html. By contrast, the Praxity Family Business Survey“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, http://praxityprod.awecomm.com/News/2009/Pages/UKFamilyBusinessSurvey.aspx. found that it is considered OK to talk about the business anywhere and at any time, whether at work or at home:
In family businesses, it is particularly important not to convey the impression that family members are more in the know than other employees. “…Even when this is not the case, the potential for the perception of exclusivity may exist. Steps should be taken to address any issues that may arise openly, honestly, and without preference for family members.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html.
If good communication channels are not in place, the following can occur:
These difficulties can be overcome if the family business makes a concerted effort to create and maintain an environment of open communication where people feel comfortable voicing opinions and concerns. It is important that family and nonfamily members have an equal opportunity to express their views.
It is natural for a family business to employ family members, especially in management positions. Family members tend to be the first people hired when a small business gets started, and as the business grows, so do their roles.Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the -family-business-a220028. There are both pros and cons to hiring family members. Both need to be considered carefully. Who to hire may well be the biggest management challenge that a family business owner faces.
On the positive side of things, several advantages can be identified for hiring family members:Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html; and Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the-family -business-a220028.
“A family whose members work well together can also give the business a welcoming and friendly feel. It can encourage employees who aren’t in the immediate family to work harder to gain acceptance by those employees who are.”Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the -family-business-a220028.
There are also quite a few disadvantages to hiring family members:Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html; Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the-family-business -a220028; Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69; and Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
Families are not perfect, so a dispute among family members can spill from home into the workplace.
Newly hired family members may feel that they do not have to earn their positions; their success will be seen as linked to their name instead of their abilities.
There will be times when the better decision may be to hire a nonfamily person for a particular job. Experience has shown that a family business is less likely to be successful if it employs only family members; bringing in the fresh thinking that comes with external expertise can be valuable at all levels of a business.“Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf. In addition, nonfamily members can offer stability to a family business by offering a fair and impartial perspective on business issues. The challenge is in attracting and retaining nonfamily employees because these employees “may find it difficult to deal with family conflicts on the job, limited opportunities for advancement, and the special treatment sometimes accorded family members. In addition, some family members may resent outsiders being brought into the firm and purposely make things unpleasant for nonfamily employees.”“Family Owned Businesses Law and Legal Definition,” USLegal.com, 2010, accessed October 8, 2011, definitions.uslegal.com/f/family-owned-businesses. Because it is likely that a growing family business will need to hire people from the outside, it is important that the business come to terms with that necessity. Policies and procedures can help with the transition, but the most important thing is to prepare the family culture of the business to accept a nonfamily member. Not surprisingly, this is much easier said than done.
The decision to hire a professional managerAn external, nonfamily, nonowner manager. is likely one of the most important and difficult hiring decisions that a family business owner will have to make. The typical definition of professional managers equates them with external, nonfamily, nonowner managers, thus declaring professional management and family management as mutually exclusive.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. “A typical argument…is that professional nonfamily managers should be brought in to provide ‘objectivity’ and ‘rationality’ to the family firm.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
There are several problems with this way of thinking. First, it perpetuates the outdated notion that family members are not professional, that the smartest thing for a family business to do is to bring in professional management—as quickly as possible.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
Second, professional managers are not always prepared to deal with the special nature of family-owned businesses. “The influence of families on businesses they own and manage is often invisible to management theorists and business schools. The core topics of management education—organizational behavior, strategy, finance, marketing, production, and accounting—are taught without differentiating between family and nonfamily businesses.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 4. This does an injustice to the unique workings of a family-owned business.
Third, a professional manager from the outside is not always prepared, perhaps not even most of the time, to deal with the special nature of family companies. The dominant view on professional management downplays the importance of the social and the cultural context. “This is a problem in family firms where family relations, norms, and values are crucial to the workings and development of the business.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. It is argued that the meaning business families attach to their businesses is guided by family values and expectations—so much so that “anything or anyone that interrupts this fragility could send the business into chaos.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
The hiring of an outside manager, therefore, should include an assessment of both formal competenceFormal education, training, and experience outside the family business. and cultural competenceAn understanding of the culture of a specific firm.. Formal competence refers to formal education, training, and experience outside the family business. Although it is certainly helpful and appropriate, formal competence is not sufficient for managerial effectiveness. It needs to be supplemented with cultural competence, an understanding of the culture of a specific firm. Interestingly, most family businesses look only to formal competence when selecting a CEO.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
It is extremely important to understand the culture of the family firm. It means that as a leader you have to be sensitive to the organization’s reactions on the things you say and do. I have a long-term employee on my management team, and she is my guide in these issues. She can tell me how the organization will react and how things are likely to be received. We have to build on the past even though we have to do a lot of things in new and different ways. But because of the culture, this might be very sensitive. (The words of a nonfamily CEO in a family business.)
As a nonfamily CEO, you have to have in-depth respect for the invisible forces among the employees in the family firm. You cannot escape the fact that there will always be special bonds between the family firm and the owner. Always. (The words of a nonfamily CEO in a family business.)Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
One concern of family businesses may be that the hiring of a nonfamily manager will result in the loss of their “familiness.” However, one study found that, even with nonfamily managers bringing nonfamily management activities, styles, and characteristics, “the special and unique aspects and forces of the system of the family, its individual family members, and the business itself provide a synergistic force that offsets the outside influences of the [nonfamily managers].”Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209. This same study acknowledged, however, that their research did not focus on understanding at what point, or percentage of nonfamily members, the feeling of “familiness” will begin to erode.Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209.
One of the more difficult challenges that a family business must face is determining employment qualifications for employees, both family and nonfamily. The lack of a clear employment policy and process can lead to major conflicts in the company. Unfortunately, it would appear that, despite their benefit, most family businesses have a family employment policy.“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf. As a result, many family businesses may end up with more employees from the family than the company needs, and some of these people may not even be qualified or suitable for the jobs they have been given. “Some family businesses even find themselves acquiring businesses that have no relationship with their original business or keeping some unprofitable business lines just to make sure that everybody in the family gets a job within the company.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1 -SABIS%C2%AE-. This kind of situation benefits no one.
A written family-business employment policy can solve a myriad of problems because it spells out the specific terms for family and nonfamily members with respect to recruiting, hiring, promoting, compensating, and terminating. One recommendation is that an ideal family employment policy should include the following:“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf.
Others have recommended “that family members meet three qualifications before they are allowed to join the family business on a permanent basis: an appropriate educational background; three to five years’ outside work experience; and an open, existing position in the firm that matches their background.”Craig E. Aronoff and John L. Ward, Family Business Succession: The Final Test of Greatness (Marietta, GA: Business Owner Resources, 1992), as cited in “Nepotism,” Reference for Business.com, 2010, accessed October 8, 2011, www.referenceforbusiness.com/small/Mail-Op/Nepotism.html.
There are no rules that dictate the content of a family business employment policy, so differences from one family business to another can be expected. However, it is very important “to set employment conditions that do not discriminate against or favor family members. This would help establish an atmosphere of fairness and motivation for all employees of the family business.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1-SABIS%C2% AE-.
The benefits of an employment policy notwithstanding, the idea may be met with resistance. There may be the feeling that hiring decisions for family members should be separate from the hiring decisions for nonfamily members because being a family member provides special qualifications that cannot be matched by someone outside the family. How to proceed will ultimately fall on the shoulders of the family business owner.
As difficult as hiring decisions may be for the family business, decisions about salaries and compensation are probably even worse. No matter how well intentioned and well designed the company’s compensation plan may be, there will still be jealousies, hard feelings, severed sibling relationships, and even lawsuits, particularly among those family members who feel they have been treated unfairly.“Family Owned Businesses: Compensation in Family Businesses,” Gaebler.com Resources for Entrepreneurs, 2010, accessed October 8, 2011, www.gaebler.com/Compensation-in-Family-Businesses.htm. This presents a daunting challenge: how to develop a compensation plan that will be fair to family members and good for the business:
One of the greatest struggles of operating a family business is separating the family from the business. Oh yes, there are many great benefits to having family in the business and to being a family member in a family business, but the most difficult problems result when “family values” and issues take over, leaving business values and needs wanting. There is no greater source for family business problems—nor more fertile ground for their cure—than the family business compensation systems.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344.
Family businesses often make several common mistakes when developing their compensation plans.
The business overpays family members—for a variety of reasons:Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
Emotional pressures are allowed to determine compensation policies. What this means is that compensation is not correctly determined by job requirements and performance in those jobs. When this happens, small problems develop centrifugal force:Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
Developing a fair compensation plan for the family business is not easy. It requires good faith, trust, and good business sense. The dollar amounts offered to family members will be critical, but the more pressing issue is fairness.Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html. Unfortunately, fairness is often construed as equality. This must be avoided.
There is no template for designing a compensation plan for family businesses, but there are several recommendations:Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344.
Family members employed in the business will be paid according to the standards in our region, as reported by our trade association, for a specific position, in companies of our size. In order to retain good employees we will pay all employed family members and other managers within the top quartile of our industry’s standards. Additional compensation will be based on success in reaching specific company goals, with bonuses shared among all members of the management team. Individual incentives will be determined according to measurable goals for job performance determined each year, and reviewed by the appropriate manager.Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
A recent family business survey“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, http://praxityprod.awecomm.com/News/2009/Pages/UKFamilyBusinessSurvey.aspx. reported that the following things keep family business owners awake at night.
|Rank||The Nightmare||Percentage Citing as a Significant Concern (%)|
|1||Family members can never get away from work.||18|
|2||Business disagreements can put strain on family relationships.||17|
|3||Emotional aspects can get in the way of important business decisions.||16|
|4||Transition to the next generation is more difficult than a third-party sale.||10|
|5||There can often be conflicts regarding the fairness of reward for effort.||9|
|6||The business rewards are not necessarily based on merit.||8|
|7||Family members find it difficult to be individuals in their own right.||5|
|8||Difficulties arise in attracting professional management.||5|
|9||Children can be spoiled through inequitable rewards.||4|
|10||Outside shareholders do not contribute but take payouts from the business.||3|
|11||The family is always put before the business and therefore can be less efficient.||3|
|12||Past deeds are never forgotten and are brought up at inappropriate times.||2|
Other urgent issues identified by a different family business survey included, in order of importance, the following:“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf.
Another important issue that is particularly difficult for family businesses is succession. As mentioned earlier in this chapter, succession is about passing the business to the next generation. Decisions have to be made about who will take over the leadership and/or ownership of the company when the current generation dies or retires.“Family Owned Businesses Law and Legal Definition,” USLegal.com, 2010, accessed October 8, 2011, definitions.uslegal.com/f/family-owned-businesses. Interestingly, “only a third of all family businesses successfully make the transition to the second generation largely because succeeding generations either aren’t interested in running the business or make drastic changes when they take the helm.”“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm. There are family businesses that manage the transition across generations quite easily because the succession process chooses only the children willing and able to join and work with the prevailing family, business values, and goals. Unfortunately, there are also instances in which children have had to leave school as soon as legally allowed, not equipped to manage either the business, their lives, or their family. These children spend many resentful years in the business until it fails.Sue Birley, “Attitudes of Owner-Managers’ Children Towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.
Passing the family business to the next generation is a difficult thing to do, but succession is a matter of some urgency because 40 percent of US businesses are facing the issue of succession at any given point in time.Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf. This urgency notwithstanding, there are several forces that act against succession planning:Ivan Lansberg, “The Succession Conspiracy,” Family Business Review 1 (1981): 119–44, as cited in Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf.
These are powerful forces working against succession planning, but they need to be overcome for the good of the founder, the family, and the business. It will be tricky to balance the needs of all three and fold them into a good succession plan.
Voyageur Transportation, a company in London, calls its successful succession planning program, “If you got hit by a beer truck, what would happen to your department?”“Sample Succession Planning Policy,” accessed October 8, 2011, www.experienceworks.ca/pdf/successionpolicy.pdf. As a family business owner, you should pose this question in terms of yourself and your business. Hopefully, this will provide the impetus you need to develop a succession plan.
A good succession plan outlines how the succession will occur and what criteria will be used to judge when the successor is ready to take on the task. It eases the founder’s concerns about transferring the firm to someone else and provides time in which to prepare for a major change in lifestyle. It encourages the heirs to work in the business, rather than embarking on alternative careers, because they can see what roles they will be able to play. And it endeavors to provide what is best for the business; in other words, it recognizes that managerial ability is more important than birthright, and that appointing an outside candidate may be wiser than entrusting the company to a relative who has no aptitude for the work.“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.
A good succession plan will recognize and accept people’s differences, not assume that the next generation wants the business; determine if heirs even have enough experience to run the business; consider fairness; and think and act like a business. The plan should also include a timetable of the transition stages, from the identification of a successor to the staged and then full transfer of responsibilities, and a contingency plan in case the unforeseen should happen, such as the departure or death of the intended successor or the intended successor declining the role.“Family-Run Businesses: Succession Planning in Family Businesses,” Business Link, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type =RESOURCES&itemId=1074446767. It would also be helpful to get some good professional advice—from company advisors who have expertise in the industry as well as other family-run businesses.“Avoid Feuds When Handing Down the Family Business,” 2010, AllBusiness.com, 2010, accessed October 8, 2011, www.allbusiness.com/buying-exiting-businesses/exiting-a-business/2975479-1.html.
Although each succession plan will be different, the following components should be seen as necessary for a good succession plan:“Components of a Good Business Succession Plan,” April 18, 2011, accessed October 8, 2011, www.entrepreneurshipsecret.com/components-of-a-good-business -succession-plan.
As difficult as the planning process can be, the goal should be a succession plan that will be in the best interests of all—or most—of the parties involved. Business interests should be put ahead of family interests, and merit should be emphasized over family position.“Family Succession Plan First Then the Succession Plan for the Family’s Business,” Family Business Experts, 2011, accessed October 8, 2011, www.family-business-experts.com/family-succession-plan.html.
In 2008, when R. Michael Johnson—Mikee to everyone who knows him—took over the pressure-treated lumber company his grandfather founded in 1952, he had a great idea: laptops for all managers and sales staff.
“‘You would have thought the world was coming apart,” says Johnson, CEO and president of Cox Industries in Orangeburg, South Carolina. One salesman—convinced that the computer would be used to track his movements outside the office—up and quit. A buyer who had been with the company for thirty-five years said he would like a fax machine but could not see why he needed a computer when he had managed just fine without one for so long.
And that was just the beginning. In an industry where some businesses still write delivery tickets by hand and tote them up on calculators, Johnson recently led the company through an ERP (enterprise resource planning) software conversion and distributed iPhones to the sales team so they can use the company’s new customer relationship management (CRM) system.
“‘Let’s just say I have spent quite a few Sunday lunches after church explaining technology acronyms to Granddad and Grandmom,” Johnson says.
The resistance to new technology quieted, however, after Johnson was able to point to market share growth of 35 percent at the $200 million business in the past year. “The numbers are starting to resonate,” he says. “Five years ago, I couldn’t even say what our market share was because we didn’t have the technology to figure it.”Karen E. Klein, “When the Third Generation Runs the Family Biz,” Bloomberg BusinessWeek, April 9, 2010, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/apr2010/sb2010049_806426.htm.