Family-owned businesses face unique challenges

Expert offers five tips for running a successful family business
family business
Image courtesy Isabell Schulz/flickr.

On Tuesday, March 29, National Mom and Pop Business Owners Day honors the millions of family-owned businesses that help drive the U.S. economy. According to the Small Business Administration (SBA), family-owned businesses make up 90% of all business enterprises in North America, and are responsible for 62% of U.S. employment.

Anyone who owns and operates a family-owned business can tell you that it’s not the easiest thing to do. Many families find they are together all week as well as engaging in family activities on the weekends. I’ve had people tell me that it seems that all they talk about every time they get together is work, and that often causes stress between family members.

I’ve heard many stories from family business owners that don’t paint a pretty picture. Some families have ended up in court battling over ownership shares and management responsibilities. It’s no wonder, according to the SBA, that only one-third of family-owned businesses make it to the second generation and a mere 12% make it to the third generation. Only 3% operate at the fourth generation and beyond.

Baruch College professor Elisa Balabram, an expert in small business management and entrepreneurship and the author of Ask Others, Trust Yourself: The Entrepreneurial Woman’s Key to Success, offers five tips to running—or even starting—a successful family-owned business.

Focus on communication. “It is so important for the family members of a business to communicate well with each other,” Balabram says. “They should practice transparency, build trust, determine and agree on family business values and understand the members’ goals and aspirations within and outside the family business.” She also suggests that families set up weekly business meetings, while allowing time for family issues.

Understand and define roles. “It is common for family members to occupy multiple positions without a defined job title,” says Balabram. “This can create conflict, as there is a clear leadership role, and no one knows who is responsible for specific tasks. At family business meetings, discuss each person’s role, skills and talents, and find the best fit for them. This structuring can help professionalize the business and improve everyone’s accountability.”

Write a family constitution. “The more family members involved in this process the better, as it will give people a sense of ownership,” states Balabram. Some of the items to include are mission and vision statements; ownership policy; family-bank and/or family venture capital funds; dividends and benefits policy; liquidity policy; rules for who can be elected to the board of directors or join the advisory board; succession planning strategies; rules about the family council; and information regarding shareholder meetings.

Hire employees that are not family members. Balabram suggests adding independent directors to the board to provide non-biased input and attract talent that family members may not have. “Non-family employees can share their expertise and serve as non-biased supervisors and mentors to the next generation,” she says. “Having independent directors on the board brings an additional sense of professionalism, and they can assist with the company’s strategic and succession planning.”

Empower the next generation. Set rules regarding opportunities available to family members and give the next generation a chance to work part time. Pay them market value and hold them accountable to perform their jobs well, Balabram advises. “Encourage them to pursue their education and career dreams.”

Balabram also suggests that you allow the next generation to work elsewhere in order to gain experience and new perspectives on running a business. I actually know a molder who did this. His son worked in his molding facility as he was growing up, but the father stipulated that he had to work for one year at another molding facility after finishing college to gain some outside experience before becoming part of the family business. The son told me that it was the most valuable thing he did and gave him some unique insights that he couldn’t have gotten had he just stayed with the family-owned molding firm.

Giving the next generation the freedom to choose their own career path—whether it’s within the family-owned business or outside of it—allows them to follow their dream without feeling like they are disappointing their parents.

From my perspective in discussing these issues over the years with family owners, the business was the dream—the baby, as it were—of the first generation, but perhaps the second or third generation doesn’t share that dream. They may have dreams of their own. The first generation needs to make it clear that everyone is free to follow his or her own dreams—just because they are part of the family doesn’t mean they have to become part of the business.

Finally, notes Balabram, “When they choose to join the business, make sure to mentor and empower them so that they are ready to take the leadership role when the time comes.”

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