Tips on maneuvering through the minefield that is a family business.

Business schools don't talk about family businesses. Yet at least 4.1 million businesses in the United States today are family owned and operated with a lot of family involvement.

Another 12.3 million businesses have some family involvement. These businesses account for 42 percent of the gross domestic product.

“Very few family businesses survive to the second generation, but the third generation is even harder,” says Dennis Jaffe, Ph.D., founding member of the Aspen Family Business Group, professor at Saybrook Graduate School in San Francisco and author of “Working With the Ones You Love: Building a Successful Business.” While 40 percent of family businesses survive to the second generation, only 15 percent make it to the third. And only a minuscule 1 percent ever see the fourth generation take up the management reins.

Why do they fail? “Two main reasons: family issues overwhelm the business, and family members neglect renewal of the business,” Jaffe told Quality Service Contractor members at the group's Power Meeting XXI July 22-24 in San Francisco. While owning and managing any business can be difficult, a family business has its own set of challenges. And these challenges multiply with every generation.

Family Vs. Business

Family members working together in a business must keep family and business issues separate, Jaffe says, and balance family and business goals. “Set boundaries within the home for talking about the business, and create a respectful working relationship when a family member enters the business. This is especially crucial for family members who may not get along.”

Families also must have a realistic view of the financial picture of the business; it may not be able to support all of the family members and their families.

“Talk to family members and make sure they want to be in the business,” he says. “If they don't think of the business as a career, they shouldn't stay in.”

This involves a change of attitudes, he adds, about entering or staying in the family business even if you don't want to. Why force someone to join the family plumbing or heating business if they don't like it? Is that family member really adding anything to the bottom line? Is “family duty” worth shrinking profits?

Another factor to consider is generational value shifts. “Each generation may have different values and expectations about how the business and money is used and managed,” Jaffe explains.

In the past, family businesses were patriarchal, with leadership passed to the oldest son at the founder's death. Business cycles were slow and predictable, and the basic values of work remained the same. There also was an aura of secrecy as business issues were never discussed directly.

Today, siblings, in-laws and “outsiders” work along side each other, and succession can occur in the prime of the founder's life. There are changing values about work, and women are much more active in the business. Communication of values and ideas is crucial for success.

Families also must make sure to keep renewing the business so it does not stagnate. “Over time, the virtues of the family business can become problems, making it difficult for the business to develop and evolve,” Jaffe says.

These include:

  • Valuing loyalty over results
  • Difficulty letting anyone go
  • Not confronting the founder or each other
  • Focusing on internal politics/power struggles rather than customers
  • No new blood to shake things up
  • Orienting on past triumphs rather than future
  • No long-range plan for development
  • Little innovation in systems or products
  • Focusing on existing markets and customers
  • Employees lack ability to handle new demands

The Key To Success

One hurdle to overcome is the “psychology of the entrepreneur,” he adds, where the personality and style of the founder/owner permeates the business, leaving little room for others in the family to contribute. The business is the center of the founder's life, and he/she can't let go of control.

The ideal is to move toward partnership in management - a team concept rather than individual control, Jaffe explains. This would include family and nonfamily members to help infuse the company with the challenges and opportunities that employees want.

“Heirs are not just entitled to the benefits of the business,” he notes. “They must know how to fund the business, take on risk and recapitalize.”

To make these changes, the family needs to create a different style of governance, a more structured style to stay connected across generations, Jaffe says. The structure also will balance the personal, family and organizational concerns.

The core elements of this new family governance structure are:

    1. Information flow. Don't keep everything to yourself. “A lot of fights and misunderstandings come from lack of communication about the financials of the business,” Jaffe explains.

    2. Family councils. Get the family members together to discuss the issues. “Tasks include defining the core purpose and values for the business and wealth, and regulates family involvement in the business,” he notes. An alternative would be a board of directors.

    3. Creating boundaries. Separate the family issues from the business issues.

    4. Accountability. The business is the asset of the whole family, and everyone is responsible for ensuring the profitability of that asset.

    5. Agreements. As there are more people and assets in the business, the family needs agreements on how things are done.

Another part of the governance structure is the family charter, Jaffe adds, which can provide guidance that anticipates tough issues, support continuous development and education for family members, foster harmony and resolve issues, provide direction about owners' expectations, and establish policies and plans regarding family assets.

“We're looking at families in business, not just family businesses,” he notes. “The goal is to preserve the asset base and not just the business. And to achieve success against the long odds, families must learn to communicate, collaborate and manage conflict.”