In the beginning, a family business sounds like a sensible idea. One family member can tend to the books while another takes charge of day-to-day operations. And it may all run like clockwork – for a while.
But what if the company grows and the accounting responsibilities exceed a family member’s capabilities? What if someone doesn’t agree with the direction the company is headed? Or a divorce, illness or death upsets the company’s equilibrium?
The truth is, there are countless ways that a business can wreak havoc on a family. As a banker who works with family businesses, I have seen it happen too many times. But I’ve also worked with families who have taken steps to avoid these pitfalls.
Steps To Keep The Family Business Healthy:
Look outside the family for objectivity. Family members rarely give honest, objective business advice – especially when a business is first starting. Some risk-averse relatives may throw a wet blanket on even the most brilliant ideas. Others are hesitant to tell another family member that their idea won’t work, that they’re charging too much or anything else that seems unsupportive. Many just don’t want to be proven wrong, so they keep their opinions to themselves.
The bottom line: It is better to identify a team of “neutral” advisors outside of the family who you can trust for impartial advice when you’re facing important business decisions. This group can include professionals from a variety of fields; an attorney, an accountant and a banker make a good start.
Six Points to A Good Family Business
1. Hold relatives accountable. Families that don’t wish to upset the apple cart at home may refrain from holding family members accountable for their performance. Such an approach is not only bad for business; it can also hurt the morale of family and non-family members alike.
2. That’s why you should set goals for each family member whether they relate to sales, profits or operations. Make sure they know the consequences for nonperformance. Family members should also participate in regular discussions of the company’s future to help ensure that everyone buys into the company’s larger goals.
3. Know your limits. In families, the line between business and personal lives gets fuzzy, and the financial success or failure of one often directly impacts the success or failure of the other. That’s one reason why you should develop a business plan as a family, and include your banker and other advisors in that process. Such a plan can give family members a basic understanding of how cash can be expected to flow in and out of your company. Your banker, meanwhile, can help you understand the amount of debt you can take on and guide you toward the financial vehicles and solutions that best fit your company’s circumstances.
4. Begin training the next generation of leaders sooner, rather than later. You may think it will be years, perhaps decades, before you’re ready to retire. In a perfect world, events happen on our own timetables. But we do not live in a perfect world.
5. That’s why it’s important to have a formal plan in place to identify and train family members for their future roles. It’s also another reason why you’ll want non-family members on your board of directors; they can help ensure that the most qualified family members are chosen to lead. One of the worst mistakes a family business can make is to place someone in a position of authority – solely because he or she is “family.”
6. Put agreements in writing. No one likes to think about death or divorce. But succession and contingency plans – including obtaining key man insurance and establishing buy-sell agreements – today can help eliminate power struggles down the road should the unexpected happen. To be most effective, it’s best for these plans to be put in place while the founders are still playing an active role in the business.
7. Be flexible. Understand that family members are people, and people change. Children may not wish to follow in their parents’ footsteps. Sometimes, the best way to ensure a family business’ longevity is to recognize and respect your family members’ interests and limitations, and to identify leaders with the fortitude to follow a business’ long term vision. Such decisions can be difficult. In the long run, what’s best for the company is also often what’s best for the family as well.
Stoney Roberts is Vice President and Small Business Banking Sales Manager at Commerce Bank in the Springfield, Mo., region.
