Family businesses face a special set of challenges

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by Edward D. Hess

Family businesses are a major part of the U.S. economy.  Eighty percent or more of all businesses in the United States are family controlled.  In addition, more than 60 percent of the U.S. work force works for a family business, according to the Family Business Review.  Family businesses embody our country’s entrepreneurial spirit and represent the hopes and dreams of many for financial independence and family enrichment.

What makes managing family businesses challenging is the added complexity of family dynamics. Consciously or subconsciously, these businesses factor in the family’s needs and emotional issues in making business decisions. These extra elements can include sibling rivalries, jealousies, and competition for parental love, approval and financial favor.  Family ways of communicating and generational differences also can contribute to the difficulty of trying to manage the business and the family successfully.

And what is success for a family business?  Successful legacy family businesses do not let the family destroy the business or the business destroy the family.

My 25 years of working with family businesses has taught me that:

1) Your chances of having a successful multi-generational family business will be greater if you proactively and pre-emptively manage both the business and the family. Family issues will occur. It is best to deal with them openly and directly instead of trying to avoid them. Avoidance only builds resentment and creates more emotional baggage;

2) In order to manage a multi-generational family business successfully you need to understand that, as the family expands and ages, the emotional and financial needs of its members will change with their life circumstances. These changes will put stress on the business. Many problems are predictable and occur in almost all family businesses. Common issues involve inter-generational and intra-generational equity in the company (concerns about position, power, money and leadership) and financial equity between family members working in the business and those who are not.

3) To manage a multi-generational family business successfully you need a process that encourages frequent family communications about the business and sets forth a procedure for raising, discussing, and resolving business issues in a respectful, fair and inclusive manner;

4) The process should be based on four fundamental principles: transparency, inclusiveness, consistency and fairness. Spouses of family members should be included even if they have no direct ownership in the business;

5) The process should also reinforce key family values.  These values (such as respect, humility, stewardship, integrity, equity, etc. ) will be the overriding factors in mitigating jealousies, rivalries and personal financial self-interest;

6) Unlike some other businesses, family businesses cannot be managed in a hierarchical, top-down, command-and-control manner;

7) The manner in which family members have input and communicate with each other is as important as the answer to any particular issue; and

8) Family business issues are difficult. They need time for incubation and consensus building. Many do not lend themselves to an entrepreneurial business-decision style.

A family and a business are two dynamic, evolving, changing organisms. Each is unique, and each has it own challenges.  It is this constant change — the evolution of the family and the evolution of the business — that creates a continuous flow of multi-generational family business issues. They need to be managed proactively in order to increase the probability of the business remaining successful and the family remaining harmonious. 

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