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Avoid These Common Pitfalls in Family-Owned Businesses

Posted by Scott Lynett, Esq. | Nov 08, 2022 | 0 Comments

Your family and your business are two of your top priorities. You would not do anything to compromise either of them. But working with family members in a family-owned business presents unique challenges that can cause lasting damage to both if not properly managed.

Family-owned businesses are capable of the same success as any other business. Walmart, Chick-fil-A, Comcast, Carnival, Dell, and Ford Motor Company are not only some of the most successful companies in the world—they are also family businesses. The key to successfully running a business with your family lies in not allowing interpersonal dynamics to interfere with sound decision-making.

This may be easier said than done, but an awareness of common mistakes in managing a family business is the first step. The next step is to create tools and strategies that keep family problems from derailing the business.

Work-Family Balance

Family-owned businesses are a driving force behind the nation's economy. According to the U.S. Chamber of Commerce, there are 5.5 million family businesses in the United States. They account for 57 percent of gross domestic product and employ 63 percent of the workforce.

On the surface, it may seem that a family business offers the best of both worlds. You get to build a business you are passionate about and share your success with loved ones. Who would not want to combine entrepreneurial spirit with family fun?

There is no reason that your business and your family cannot coexist and even thrive. Historically, there has often been no boundary between family life and work life. In modern times, family businesses may have certain advantages over other businesses, including a focus on the future, a commitment to quality that reflects the family name, and added concern for employees. However, combining family and business also tends to raise a distinct set of management challenges, including those discussed below.

Lack Of Defined Roles

Running a family business may require an all-hands-on-deck approach. Husbands and wives, children and parents, extended family members, and different generations may wear multiple hats, serving as employees, managers, shareholders, and advisors at various times. These overlapping and potentially unclear roles can be a source of conflict. Existing family dynamics and communication styles that are inappropriate in a work environment may worsen business conflicts.

Professionalism is key to any business and arguably more so in a family business. Family members involved in the business should occupy roles that best suit them, understand what is expected of them, and respect the boundaries of their duties. Clearly delineated responsibilities help to create ownership of—and respect for—business roles. It is nice to know that others are ready to jump in when needed, but when roles become too blurred, conflict can result.

Governance Structure

Clearly defined roles and expectations start at the top. That means having a board that is in charge of governance practices. According to a study reported in the Harvard Business Review, 94 percent of surveyed family firms were controlled by a supervisory or advisory board. A board can help separate the family from the business and ensure that business decisions are handled professionally.

To that end, it may be worth considering nonfamily board members. In the referenced study, family representation on such boards averaged about one-third. In other words, nonfamily representation tends to make up the majority of the board. This can improve the business's prospects of managing and attracting both family and nonfamily talent. Your business may currently be a side hustle or part-time endeavor. Once it expands, however, a governance baseline should be established.

Motivating Nonfamily Workers

It is not just at the governance level that nonfamily members can play a stabilizing role in your business. You will probably also need to hire outside employees at some point, especially as the business grows.

Outsiders might have concerns about joining a family business because of the possibility of nepotism. If nonfamily workers are held to a different standard than family workers, they will be difficult to motivate and retain. A level playing field in terms of treatment and advancement is essential. Trust and loyalty tend to be stronger in family businesses and are important ingredients of growth. A merit-based culture that holds everyone to the same standards can motivate everyone, whether family or nonfamily, to achieve more.

Succession Planning

A family is a chain that stretches from generation to generation. Correctly managed, your business can become a part of your family legacy, enriching the current generation and generations to come. Unfortunately, the odds are not in favor of multigenerational family businesses. Only about 30 percent of family-owned businesses successfully transition to the second generation. By the third generation, that number drops to 12 percent, and into the fourth generation and beyond, it is only 3 percent.

Succession planning—determining who will assume leadership and ownership of the business when the current generation steps down or passes away—is crucial for any business. Being caught without a succession plan can throw the business into chaos if the current management team is suddenly no longer available to provide leadership. It could even lead to its demise. To avoid harm to the business, the plan should be in place years prior to the actual transition so that those stepping in have time to learn and prepare.

We Can Help

Do you need help navigating the risks involved in running a family business? Every part of a business affects every other part. Concerns in one area can quickly spread to another and reveal existing structural deficits. An experienced business attorney can work with you to develop policies that mitigate the risks inherent to family-owned businesses. Keep your family business running smoothly now and in the future: contact our office to schedule an appointment.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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