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September 20, 2019

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City National Bank

Tips for managing the family component of a family business

City National Bank family business native

By Bruce Ford, City National Bank

Running a family business can be just as rewarding as it is challenging.

While working closely with loved ones to build a successful and profitable venture can be gratifying, managing a family enterprise can also come with tremendous challenges. The dynamics of familial relationships can be difficult to deal with at home, and when carried into the workplace, unforeseen issues can arise at the office as well.

Because of these hurdles, along with other obstacles that come with owning a business, family businesses are not frequently survived through the generations. According to the Harvard Business Review, about 70 percent of family-owned businesses fail or are sold before they can be handed to the next generation, and only 10 percent remain active and privately held into the third generation.

Though family businesses face an array of obstacles, the family side of family business can be overcome with careful management.

Drawing the line between business and family

It’s important for members of family-owned businesses to set boundaries to keep their work and personal relationships separate. However, maintaining dual relationships can be tricky and, regardless of how hard you might try to uphold these boundaries, the lines may get blurred at some point.

Misunderstandings, miscommunications and other disputes have the potential to cause harm to both your business and your family. Being able to recognize these problems and take the appropriate steps to minimize their impact early on can help ensure the longevity of your family’s business.

Tips for striking a harmonious balance

• Keep “shop talk” to a minimum at home.

Just as it’s important to keep family discussions out of business settings, you should limit talking about business at home.

For many people, it’s unrealistic—and even undesirable—to avoid “shop talk” entirely, but setting boundaries and conditions can help. For instance, maybe you decide to curb these discussions during the weekend, during dinner or while on vacation.

• Communicate openly and honestly.

Set aside time for family members involved in the business to meet as a group to talk openly and honestly about anything that’s on their mind.

This time should be reserved strictly for business matters—it shouldn’t be used to talk about personal issues or problems within the family. If you need to have both conversations, choose a separate time and location for each.

• Make business decisions without consideration of family repercussions.

There will be times when family businesses are faced with making decisions that align with the best interests of the company, but may conflict with the interests of a family member. In these situations, you must make the right business decision, regardless of its possible effect on any single employee, including family. You owe it to the company and your other employees.

• Treat all employees fairly.

One of the biggest challenges for family-business owners is granting equal, unbiased treatment to all of their employees. Often, owners have the tendency to go to one extreme or the other: Some afford preferential treatment to family employees, whereas others may treat family members more harshly to avoid the appearance of favoritism.

Unfortunately, both scenarios cause discontentment among staff.

If non-family employees believe that family members are being treated advantageously, it can cause resentment and may even encourage good employees to look for jobs elsewhere. On the other hand, if family employees feel as if they are held to an unreasonably high standard, their morale and productivity may suffer.

Striking a balance between the two requires business owners to be especially mindful of their behavior.

• Don’t be afraid to let family members fail.

Business owners can be overprotective of a family member, to the point of denying them responsibility or decision-making authority, which can hinder professional growth. This is especially common with parents who employ their children.

It’s necessary to fight that protective instinct, because the most valuable business lessons often come from failure. Give your kids the freedom to fail, ideally while you’re still there to get things back on track.

• Form a non-family board and a family business constitution.

Many family-owned businesses can benefit from establishing a non-family board of advisers, as well as drafting a family-business constitution.

Members of a non-family board—which might include your attorney, banker, CPA and/or other business advisers—can offer outside perspectives to help frame family business issues objectively.

A family-business constitution should outline the core principles governing the family business clearly and in writing. This document may include corporate governance, employment and compensation guidelines, policies regarding the ownership of business shares among family members, as well as the company’s mission, vision and values.