Family business, tricky business?

Family business, tricky business?

A successful family owned business offers many benefits to both the family and its employees.

The family receives financial returns and emotional satisfaction as a result of building and sustaining a business that is passed on to future generations.

Employees enjoy greater stability and security because family-owned businesses are driven by the family’s values and long-term view of the future. They are less likely to be influenced by the reactions of Wall Street analysts.

A family business is defined as one that is owned and actively managed by one or more members of the same family, including couples, in-laws, parents and their children, siblings, and cousins.

Family-owned businesses are a significant force in the U.S. economy. They comprise between 80 and 90 percent of all businesses in North America. Family businesses contribute 64 percent of U.S. GDP, and they employ 62 percent of the U.S. workforce.

Yet the statistics on family business longevity reveal that owning and operating a business with family members is harder than it looks. While more than 30 percent of all family businesses are passed on to the second generation, only 12 percent make it to the third generation, and a mere 3 percent survive into the fourth generation and beyond.

If family businesses play such an important role in the U.S. economy and provide important benefits to both the family and to employees, why do so few of them remain viable beyond the third generation? What makes owning and operating a successful family business so difficult?

Here’s a story that illustrates the problem. The owner of a successful family business hired his son, Bill, to run one of his company’s major divisions. Unfortunately, the division’s performance began to deteriorate under Bill’s leadership. In spite of working closely with his father and receiving considerable coaching and guidance, Bill was unable meet the demands of leadership and return the division’s performance to an acceptable level.

The father agonized over what to do: leave his son in place as the division leader and jeopardize the company’s performance or terminate his son’s employment as division president, which would hurt and humiliate him?

He finally made the difficult decision to fire Bill. The next day, he called his son into his office and said to him, “Bill, I know how hard you’ve tried to run this division successfully. But its performance has deteriorated and shows no sign of improving. For this reason, I am terminating your employment with the company, effective immediately.”

As his father predicted, Bill was devastated. His father got up from his chair, walked around to the other side of the desk and sat down next to Bill. He put his arm around his son’s shoulders and said, “Son, I just heard that you lost your job. I’m so sorry to hear this. What can I do to help you?”

As the preceding story illustrates, what makes owning and operating a business with family so difficult is the dual role that family business owners have to play. Families and businesses have different and often competing goals and values, yet they overlap in a family business.

A system is a group of interrelated elements, and when something happens to one element in the system, all the others are affected. Families are systems made up of individual members linked by their heritage. The goal of a family is to raise children, and families value unconditional love, acceptance, and stability.

Businesses are made up of individuals who are linked by their employment in the company. A business’s goal is to earn a profit, and businesses value performance that contributes to organizational goals and the development of knowledge and skill. Businesses exist in a dynamic and changing environment.

In a family business, family members are often owners, employees, managers, or leaders in the business so they have overlapping roles: family member and business person.

Overlapping roles become challenging when choices have to be made that benefit one system over the other in the short term. In the case above, the father had to do what was best for the company and for the family in the long run, even if it hurt his son and caused pain and conflict within the family in the near term.

It can be very difficult for family business owners to keep their family and business roles separate, while remaining mindful of the family’s needs and the businesses’ long term goals. Yet the consequences of failing to do so can be disastrous.

The family that always satisfies its own needs at the expense of the business can end up robbing the business of needed reinvestment and capital. Under these conditions, the business eventually falls into decline and either fails or is sold.

On the other hand, when the family always puts the businesses’ needs ahead of its own, the next generation won’t see enough value returned to the family to warrant continuing investment and will be likely to sell the business.

Successful family business owners learn to keep family and business roles separate. They make business decisions for business reasons, and they make family decisions for family reasons. By doing this, they balance the needs of the business with the needs of their families and greatly increase their chances of successfully passing the family business on to the next generation.

Jean Stone is a family business advisor, Family Firm Institute member and founder of Jean Stone Associates. For more information about how she can help you take your family business to the next level of performance, visit her Web site at http://www.jeanstoneassociates.com/ or contact here at jean@jeanstoneassociates.com or at 630-513-9125.

Posted on Monday, July 21, 2008 (Archive on Monday, July 28, 2008)
Posted by jstoltz Contributed by jstoltz

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