Five Ways to Ensure Family Business Success
Non-family businesses can learn a lot from family businesses. A recent Harvard Business Review study reports “Family businesses outperformed non-family businesses during the boom years leading up to the 2008 recession, and during the 2001 and 2008 recession years.” Family businesses were less likely to lay off workers during the lean times, and more likely to maintain their emphasis on socially responsible programs. But that’s just the businesses that survived. Others closed their doors.
With 25 years of business management and family business consulting experience, I’ve seen the patterns that can lead to major problems. And they’re almost always preventable.
The factor that enables family businesses to rise to the top is trust. Family members can potentially trust one another far more than non-family members. But trust can erode. For instance, when a family member can’t or won’t perform at the necessary level, when there’s a sense of entitlement, drug abuse, laziness. And that can have serious, business-killing consequences. If the business is professionalized, there will be a way to deal with those issues. But too often, safeguards are not in place. Let’s look at some safeguards. I have five top success strategies family businesses can use:
1. Keep the lines of communication open. Schedule regular family meetings to discuss issues of concern and topics such as business transition, business performance and responsibilities. Include all of the family members, no matter where in the hierarchy their jobs fall. Exclusion creates animosity. Create a family manual that lays out the ground rules for how the meetings will take place to ensure everyone gets a chance to be heard, and impediments to communication are left at the door.
2. Assign clear roles and responsibilities. As a family member, it’s natural to feel that everything is “my” business. However, not every thing is every family member’s responsibility. Job definitions prevent everyone from jumping in to tackle the same problem, and help ensure the business runs smoothly.
3. Keep good financial data. The downfall of many small businesses and family businesses is not having solid data. Have a single point of contact to manage the finances. If you’re small enough, you can rely on a family member. Otherwise, you’ll need to bring in a qualified accountant. You may cringe at the cost for this, but the difference between a good accountant and a bad one is the difference between knowing exactly where you are on the road and trying to drive with a mud-covered windshield.
4. Avoid overpaying family members. Market-based compensation is fundamental and essential. Parents in family businesses tend to overpay the next generation, or pay everyone equally despite differing levels of responsibility. Both are bad practices. The longer unfair compensation practices continue, the messier it will be to clean up when it blows up.
5. Don’t hire relatives if they’re unqualified. Competence is key. Family businesses are a conundrum: The family aspect generates unqualified love, while the business side cares about profits. Thus, family members will be hired to provide them with a job, even though they’re not qualified. The remedy is to get them trained, move them to a role that matches their skills, or have them leave.
More than 70 percent of all businesses are family businesses. They account for a significant number of new jobs. But that’s not the only reason they’re so important. They’re motivated by profits, but also by other important considerations: pride in the family name, building something for future generations, and philanthropy. For those reasons, they contribute in tremendous ways to social stability. They make our communities better.
Henry Hutcheson is president of Family Business USA and specializes in helping family and privately held businesses successfully manage transition, maintain harmony and improve operations. Hutcheson has an MBA from Columbia Business School, and is a popular speaker at professional, university and corporate-sponsored events.