Family businesses are unique in that the goals and relationships of the family overlap with those of the business. Unfortunately, this overlap is often the source of tension and conflict and can create obstacles that inhibit the succession planning process. Those involved in the business must recognize the dynamics in a family business so they can identify and implement procedures that create distinct boundaries. These boundaries can help family members distinguish between their family and business roles.
Owners should recognize that the family and the business are two distinct systems, even though they often contain many of the same players. In a family, resources are often allocated based on need. The goal is to develop children who can be productive and contribute to society. As a result, family members are generally accepted unconditionally even though they have their own unique strengths and weaknesses.
In a business, the goal is to generate profits. Members of a business are more likely to be judged solely on their contributions to the success of the business. Often, family members working in a family business mistake criticism or rejection of their business role as rejection of their family role as well. Or, they believe they should receive business resources by virtue of belonging to the family rather than as a reward for business contributions.
Business Stage Influences Degree of Overlap
There are three stages of development in a business’s life cycle—entrepreneurial, managerial, and professional. The company’s stage of development influences the extent of overlap between family and business goals. Identifying the business’s stage of development may help advisers anticipate the degree of overlap.
1. Entrepreneurial Stage
The entrepreneurial stage is the initial stage of the business when the majority of the business decisions are made and controlled by the owner. This stage is characterized by a strong owner/manager 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.
2. Managerial Stage
The managerial stage is the middle stage of a business’s development. This stage is often characterized by a gradual shifting of management authority from the owner to other key employees. Typically, the business outgrows the owner’s ability to manage all aspects of its operations and he is forced to transfer responsibility to others. In addition, the business may exert more discipline over its financial resources in order 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 its own identity.
3. Professional Stage
The professional stage, sometimes called the corporate stage, is the final stage of a business’s development. In the professional stage, business decisions are based on what is best for the business. There is little, if any, family influence over a business in this stage. 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. There is minimal overlap between the family and the business in the professional stage.
Recognizing the Emphasis on the Business and the Family
It is important to determine the emphasis that the owner places on the business and the family prior to developing a succession strategy. Indications of an owner’s emphasis include:
Based on emotions
Based on accomplishing tasks
Value who you are
Value what you do
Acceptance is unconditional
Acceptance is performance-based
Rewards for competence and performance
Authority by generation and birth order
Authority by role and power
Encourage broad life experience
Focus on business activities
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.
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.
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 business.
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.
Many owners hesitate to begin succession planning or to share their planning ideas with the family because they want to avoid conflict. However, a certain level of conflict is normal and to be expected. Conflict does not necessarily mean that a family is dysfunctional. To the contrary, working through a manageable level of conflict, which allows all parties to make their ideas and wishes known, is often healthier for a family than never bringing up areas that may be potential sources of conflict.
One step in managing conflict is to let every family member be heard and acknowledged. Owners sometimes fear this because it seems like they are giving up control, but they must understand that the ultimate decisions are still in their hands. Letting everyone voice opinions and suggestions may also contribute to acceptance of the plan, provided family members believe the owner genuinely listened to and considered their ideas.
Another important step the family business can take is to establish and follow written employment, compensation, and distribution policies for family members, e.g., what it takes to be employed, how family members will be compensated, etc. The purpose of such policies is to ensure fair treatment among family members as well as non-family employees. Establishing written policies can be a function of a family council.
Conflict may also be managed by using a family business consultant. Many owners may not be comfortable addressing the emotional issues that can become barriers to succession planning. Family business consultants are trained in psychology and communication. They are very good at facilitating communication and encouraging all affected parties to openly share their feelings. Use of a family business consultant is not restricted to situations where conflict has gotten out of hand. Bringing in the consultant early on can help avoid open, hostile conflict by getting the parties to talk and listen before the situation gets out of hand.
Finally, the family should focus on what they have in common. Often this is the business itself or shared values, which can be expressed in the business’s day-to-day operations. For example, if the family members agree that community service is important and that improving quality of life in their hometown is valuable, the business can allocate funds to support local causes. In addition, employees can be encouraged to participate in community service. When the business can be used to achieve goals important to the family, it can bring family members together rather than divide them. The key is to identify what the family members think is important and ways that the business can contribute to their goals. It may be helpful to ask each family member what the business means to them now and what they would like it to be in the future. Deciding together on a mission statement, both for the family and the business, can help family members articulate their values and how they intend to act on them.