7 Pitfalls to Avoid When Running a Family Business
Entrepreneurship is rarely easy but also having family in the mix can add multiple layers of complexity – barriers and challenges that your competitors may not be burdened with. That said, the unique dynamics of a family-run business can also result in extraordinary success as evidenced by Wal-Mart, BMW, Ford and Tyson – all highly accomplished family firms. For this reason and others, the “family business” trend is flourishing. In fact, recent reports reveal that family-owned companies comprise between 80 and 90 percent of businesses worldwide, generating a staggering estimated $6.5 trillion in annual sales – “enough to be the third largest economy in the world (behind the U.S. and China)” as cited in the report.
What’s also fascinating is that The Global Family Business Index, a compilation of the largest 500 family firms around the globe intended to exemplify the economic power and relevance of family firms worldwide, found that 44 percent are owned by fourth generation or older family members. These companies are in it for the long haul and have clearly realized the kind of sustained success needed to withstand the test of time.
One major component of long-term success among family businesses is simply knowing how to navigate and circumvent personal relationships in order to work together effectively, while also maintaining positive perceptions and overall integrity with non-related staffers. Achieving all of this, while tending to “standard” business issues, can be daunting at best and a death knell for far too many.
With this in mind, here’s a list of seven pitfalls to avoid – all of which can cause an assortment of strife: from uncomfortable family friction to completely tearing a family and business apart.
Not respecting family hierarchy.
Every family has a pecking order and not respecting this order within the business will cause friction. If someone feels they are being disrespected or not being heard, it’s a recipe for resentment and conflict. A certain level of mutual respect and a feeling of collaboration is essential. Leveraging each person’s individual strengths, including management capabilities, for the business’ greater good needs to continually be top-of-mind. Each family member should take the lead in the area they have the most experience and/or knowledge regarding. There are times when a younger family member may be in charge of a particular project or aspect of the business; however, respect for family hierarchies within the organization must be maintained.
Neglecting to define or agree upon roles.
It’s important for family members to take an active part in choosing and defining their roles within the business. Make those roles official by including titles, creating business cards and including the position on your website’s “About” page. This will be a motivating factor to get the family member to acknowledge his or her position. Defining objectives is also important and, again, should play to each family member’s strengths. Each quarter, family members should define one to five key objectives and goals to accomplish. This will help keep everyone in the familial circle moving forward and will help maintain momentum within the company at large.
Not allowing enough leeway.
Family members, especially the younger ones, need the freedom to try their own projects, even if other family members aren’t necessarily on board. If the project fails, it is a learning experience – and one that individual will remember for a very long time. If the project is a success, it’s a huge win-win both for the individual and the business as a whole. In that vein, it’s important to remember that family members are not the same as regular employees and treating them as such can be a recipe for disaster. No one is more invested in a family business than a family member and, because of this, family members should have much more leeway and authority than a typical employee.
Not including the entire family on important decisions.
It used to be that parents and grandparents were the go-to family members for advice and input on important decisions. In business, it’s also important to include the entire family when making important decisions for several reasons. First of all, with 90 years and three generations of experience to draw upon in my own family business, not utilizing that collective wisdom and experience would be a tremendous opportunity loss – a woefully wasted resource. In your own family business, even if you don’t currently have the advantage of multiple generations’ worth of wisdom to draw upon, it’s important to create the expectation that everyone’s input is valuable, which it is. Second, including the spouses can also prove invaluable. They have a stake in the business the same as any other family member, and can often bring forth an “outsider’s” perspective since they aren’t as close to the issues at hand. When the entire family participates and a quorum is reached, the entire family takes ownership of that decision and the results, for better or worse. In this way, important business matters become family matters.
Having “zero tolerance” regarding personal vs. business finances.
On the one hand, keeping business credit cards under control is a must. Misuse can put the whole business at risk of an IRS audit. On the other hand, revenue generated by the business should not be off limits, either. After all, that money doesn’t belong to one person, it belongs to the entire family. No one family member should have their fist so tightly around the purse strings that no one has access to the fruits of their labor. This only serves to create power struggles and resentment. Having tolerance and compassion regarding family members’ financial needs is a must. The business exists to provide for the family. If it can’t do that, what’s the point? Allowing family members to draw from business revenue when necessary makes it possible for family members to take care of their own needs, which, in turn, helps enable that family member to maintain focus on their part in the business. Any concerns about overuse of company funds can be dealt with by drawing up and agreeing in advance to a policy regarding the personal use of revenue. No matter what your particular family dynamic is, remember that, ultimately, family is far more important than money.
Forgetting to celebrate the wins and to have fun.
Being in business with your family is a blessing. If you’re not having fun running your family business, you’re taking yourself way too seriously. Make sure you take the time to celebrate the wins in addition to learning from the losses. This is vital to maintaining morale and a general positive feeling toward the business. Any time an objective or goal is reached, time should be taken to acknowledge and celebrate that accomplishment before moving on to the next. If this isn’t done, family members may begin to feel taken for granted or unappreciated, which is a certain morale and motivation killer, as well as another open door for resentment. A family business that celebrates and supports one another creates a culture that fosters dedication and success.
Not having a conflict resolution plan.
Business disputes happen and, when those disagreements are between family members, things inevitably get personal. To avoid conflicts spiraling out of control, make sure everyone signs an agreement that states any dispute is to be handled by mediation or arbitration. Litigation should never, ever be a consideration. It will only cause irreparable damage both to the business and the family. Proper communication is key in any relationship, but even more so within the highly specialized context of family business dynamics. It’s critical to create a system and safe place in which to deal with anger between family members when it arises – away from the eyes and ears of non-family employees, as a family run businesses should also present itself as a united front. For family firms that are co-owned, have an agreement in place on awkward areas such as “veto power” and set processes and rules for how to move forward if the two parties don’t agree on an issue. This is imperative to avoid arguing and internalized anger.
At the heart of avoiding each of these pitfalls is proactive communication, systemization and conflict resolution. Ultimately, how you interact with your family in general will propagate to how you interact within your business. If you take the time to consider those scenarios that can cause dissention among family members who work together and plan out some precautionary measures, you will be well on your way to building stronger relationships with loved ones and perhaps a lasting family business legacy for generations to come. I95