Family-Business Overlap Can Create Conflict

Greg Wilson is the president and sole owner of Wilson Irrigation, Inc. (WII). He’s 59 and has two children working in the business. His daughter Katy is responsible for marketing and sales. His son Bill is in charge operations and installations. Greg has begun the succession planning process, but he doesn’t believe his children are ready to manage the business. At this time, he feels it’s in the best interest of the business to transfer management control to one of his key employee.

Due to the overlap between family and business, Greg’s decision may create bad feelings among his children and dissension in the family. Even though Greg is making a decision based on what he believes is best for the business, the children may perceive their father is being disloyal to them.

There are three stages of development in the life cycle of a business---entrepreneurial, managerial, and corporate (or professional). A company’s stage of development influences the level of family-business overlap.  

The entrepreneurial stage is the initial stage of the business and when a majority of the business decisions are made and controlled by an owner. This stage is characterized by a strong owner who builds the business largely through hard work and determination. Owners of most businesses in the entrepreneurial stage spend significant amounts of time working to develop the business. They typically perform all business functions and learn through trial and error. Businesses in the entrepreneurial stage tend to reflect the owner’s values and attitudes.

The managerial stage is the mid-stage of business development. This stage is often characterized by a gradual shift of management authority from the owner to other key employees. Typically, the business outgrows the owner’s ability to manage all aspects of the operation and the owner is forced to transfer responsibility to others. In addition, the owner may exercise more discipline over the operation’s financial resources to accommodate future growth. These factors tend to reduce the influence of the family over the business and its resources as the business takes on a life of its own.

The managerial stage is often viewed as a transition stage for the business. The business is transitioning from the entrepreneurial stage, where it is heavily influenced by the family and its goals, to the corporate stage, where family influence is minimal. As this transition occurs, the goals and needs of the business begin to take priority over the goals of the family.

The corporate, or professional, stage is the final stage of an operation’s development. In this stage, business decisions are based on what is best for the business. There is little, if any, family influence over the enterprises. Instead, the family is forced to conform to the policies of the business. This stage is characterized by a highly structured management team, market-based strategic planning, and specific corporate policies and procedures.

In family business, the owner must balance the needs of the business with the needs of the family. An owner’s emphasis on family and/or business needs can be determined by understanding the principles an owner may use to make decisions, i.e.: the following opposing principles:

Family PrinciplesBusiness PrinciplesBased on emotionsBased on accomplishing tasksValue who you areValue what you doAcceptance is unconditionalAcceptance is performance-basedForgive mistakesRecord mistakesEqual treatmentRewards for competence and performanceLasting relationshipsTask-based relationshipsAuthority by generation and birth orderAuthority by role and powerEncourage broad life experienceFocus on business activities

If a business owner is:

• Business—High; Family—Low

Many owners place their emphasis on developing the business. This is especially common among entrepreneurs and business founders. Their daily activities are focused exclusively on developing and expanding the business. They are consumed with a passion to create a successful business. Although their primary motivation may be to provide for their family financially, they often neglect their family’s emotional needs in the process.

• Business—Low; Family—High

Some owners believe the role of the business is to provide for the family. These owners often run the business like a family. They believe each family member has a right to work in the business, regardless of the member’s qualifications. They also believe all members should be treated equally and design their compensation strategy accordingly. Unfortunately, these businesses tend to perform poorly due to their lack of professional operation.

• Business—High; Family—High

There are an increasing number of family business owners who strive to achieve both a successful family life and a successful business. These owners operate their business in a professional business-like manner. They implement policies and procedures that ensure the business will not become a tool to serve the family. They also hire qualified employees to help manage the business. At the same time, they make time for their family and attempt to raise their children to respect the business boundaries of the family enterprise.

• Business—Low; Family—Low

The worst approach of all occurs when the owner places a low priority on both the family and the business. In these instances, the owner devotes little attention to either, causing both to suffer. Fortunately, this approach is not too common. It is typically found in companies that are run by second or third generation owners who do not have the skills or motivation to effectively manage the business or their family.

For owners, the best approach may be a clear and intentional focus on what’s important. Specific goals and family employment policies will help the owner and the family emphasis what’s important and how the family and the business function together.