Considerations for Family BusinessesJune 6, 2017
By: Lynn A. Conover, CPA, CFBA, The Curchin Group, LLC
Article Credit: Shore Builders Association Bulletin Board Magazine
Family businesses are found in virtually every sector of the world’s economies. In fact, they are considered the most common form of organization. A family business can range from a small mom and pop business to large multi-million dollar publicly traded companies. Family businesses and their leaders often experience many of the common problems of a regular business, but also have an added layer of problems and dilemmas related to unique family issues. An effective way to deal with these issues is the use of a team of qualified family business advisors.
First, it is important to understand “What is a family business?” The broad definition of a family business would be an organization where ownership and/or management decisions are influenced by a family. This holds true when the family has control over both the ownership and the management of the business. In this case, the family can exert great influence over the behavior of the business and likewise the business can exert influence over the family. In some cases, the family may own the business, but will take a back seat to the management function and choose to have that handled by nonfamily members. Family members here are interested in the business’ mission and goals, occupying seats on the board and receiving financial return for their ownership with no responsibility for the management of the operations of the business.
Family businesses are also unique in that they must consider a balance between three different systems that exist. The first system is the business system. This includes the organization’s mission and strategies and the infrastructure that will help the organization achieve its goals. The second system is the ownership or governance system. It includes the business’ legal formation and form of ownership, the board of directors and the goals and aspirations of those who own and govern the business. The third system is the family system. This involves the family that is connected with the business. It considers the family’s goals and aspirations, its roles and relationships, communication patterns and cultural values. Each family member could be included in one, two or all three of these systems. The goals of each of these systems may be very far apart. For instance, a goal in a family system might be the development and support of family members where a goal in a business system might be profits, revenues, efficiency and growth. These two goals in the different areas might work against one another. Each family business is unique and may require the help of family business advisors to help sort through the difficult family, business and governance issues. Sometimes a third-party point of view and objective guidance is helpful to the family in assessing and understanding the relationship a family has with its business.
Essentially, a family business can either be healthy or unhealthy. Sometimes it is unclear as to whether a business is entirely healthy or unhealthy in which case it may have attributes of each. Generally, a healthy family is one that “has fun” making money together, is without tension, has individuals who trust each other and makes use of each other’s abilities and knowledge. Some healthy attributes would be:
- Resolution of conflicts with mutual support and trust.
- Open and clear communications.
- The family’s ability to make decisions and move on.
- Family clarity about goals and movement toward them.
- Good family direction and leadership.
- Respect of appropriate work, family and intergenerational boundaries.
- Individuals are flexible and welcome the use of advisors.
- Decision making based on knowledge and expertise.
- Balance of responsibility and authority.
- New competencies and effective behavior developed by organizational learning.
- Leadership is spread throughout the company and family.
- Succession is planned early.
- Efficient use of knowledge to adapt to changes.
Governance and Ownership:
- Clear mission and goals.
- A functional board of directors with non-family members.
- A sound plan for succession and intergenerational transfer of ownership.
Effective Boundaries Between Family and Business:
- Consideration of family values in business strategic planning.
- Both systems use goals and values to steer the course.
- Business issues are not discussed in the family and vice versa.
- Mutual learning between systems.
- Understanding of individual core competencies and that of the business.
- Porous boundaries and appropriate exchange of information between systems.
Converse to your healthy family business there is a fair share of unhealthy family businesses as well. In this situation, there is no separation of the business and family issues, individuals ” are their own island” and do not work together, and there is no coordination of family and business goals. Some unhealthy attributes of a family business would be:
- Little thought given to succession planning within the family and for the business ownership.
- Unclear family member roles and obligations.
- Unclear family goals and values.
- Lack of trust between family members.
- Poor communication skills among family members and ineffective conflict resolution.
- Lack of direction and strategic planning for the business.
- Lack of expertise for the business and the family does it all.
- Lack of collaboration between and nonfamily employees.
- A nonfunctioning / absentee board of directors.
- There is no one to go to for advice and help with key problems.
- Family issues effect business issues and vice versa.
- Unclear boundaries between work and family.
To determine if a business is healthy or unhealthy, it may be more effective to identify its strengths and weaknesses in various dimensions of businesses. Infrastructure in a family business can be informal and flexible. If this atmosphere is well managed, it can foster creativity and innovation within the business. On the other hand, this informality could create a weakness where roles are unclear often causing duplications of work, confusion, boundary problems, carelessness and lack of management development.
As you can see there are many traits and considerations of family businesses that are like regular businesses. Yes, all businesses have control issues. Yes, all businesses have succession issues. Yes, all business need to define a clear set of goals and objectives. The difference here is that family owned businesses have an added dimension to the business. That is the consideration of the underlying family, its members and its goals and its interplay with the operations of a successful business.
Choosing a qualified team of family business advisors with various multidisciplinary backgrounds will provide an objective and third party approach to helping the family, the business and its owners achieve their collective goals. The family business advisory team can be the “fall guy” for the difficult decisions that sometimes must be made by certain members of a family business. They can help the family business manage the process of change. Family business consultants work at the boundaries where there are overlaps between the three family business systems. For instance, they can help family business members decide whether they should treat on another as family members or employees. They can help with succession plans to ensure the needs of the family, the business and the shareholders are considered. They can also work with the family to make sure there is proper family representation on the board and that the board runs effectively.
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