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How to Avoid Disfunction in Family Business

“It doesn’t matter the size of the business or its profitability, the human element, if unattended, will decide the ultimate destiny of the business.”

“It doesn’t matter the size of the business or its profitability, the human element, if unattended, will decide the ultimate destiny of the business.”

Family businesses are the bedrock of America’s free enterprise system. They create many of the jobs that power our economy and they collectively hold the wealth and entrepreneurial spirit that I believe will continue to drive our nation forward in the future. That’s why it pains me to see successful family companies fail.

After reading “Family Wars” by Grant Gordon and Nigel Nicholson, I learned how destructive the family dynamic can be to the health of a successful business. Their book suggests that human nature seems to present similar obstacles for all family businesses to navigate. If you believe your business is immune, I urge you to reconsider.

Conflict

Conflict usually begins when the founding generation is ready to pass ownership of the business on to its children. At this point, the considerations are endless. Who will run the business? Do you gift equal shares of the business to each child? Will it be a stock company? If so, will there be two types of stock – one with a required cash yield, the other offering long-term appreciation and equity growth? What is the exit strategy for those who will now own the business? Will the company encourage family participation and employment? The list goes on and on.

Recommendation: Hire an experienced family business advisor to help you reach these decisions before you arrive at the point of ownership transition.

My Advice: Share the wealth equally between siblings; eliminate gender as a factor in gifting or hiring decisions. The inequities established between siblings will become a constant burden and may lead to the demise of the business. Involve your children in the business to gain needed work experience and to establish respect from your employees and from each other. The experience will also provide a clear picture of the career opportunities in the business versus those available outside of it. Pay a competitive salary and benefits to the family leader and any family employees of the business and share the business’ wealth equally among those family members managing the business and those invested in it.

Rivalry

If you had siblings growing up, you probably experienced sibling rivalry; however, when you add new family members through marriage into the dynamic of a business-owning family you may see a very different kind of rivalry. Left unchecked, these rivalries can escalate into wars. Unfortunately, this reality has triggered the splitting up of families and has resulted in the demise of many successful family businesses.

Recommendation: Establish a Family Council where grievances can be heard and resolved while they are still manageable.

My Advice: Meet regularly to share business successes and hurdles so all owners will know why distributions won’t be paid or why business goals weren’t met. Transparency is essential in maintaining family harmony. Equally important is to understand your governance structure and the roles of everyone involved in owning and running the business.

Minority Role

Once ownership is passed to the heirs, those not involved with managing the business will find themselves in a minority owner position – with little to no input in the decisions made at the company level. The non-management owners will be dependent on the managing owners to operate the business.

Recommendation: Establish a Board of Directors to include independent, non-family board members.

My Advice: Choose solid business leaders who can bring an unbiased viewpoint to all decisions made. Choose people who are willing to challenge leadership so there is a healthy tension between the board and the executive management team. This will ensure the achievement of the best results possible. Let all family owners elect the board. The board should serve as the voice of all shareholders, balancing what is best for the company with what is best for the owners of the business.

Human Element

Managing your business to generate maximum financial returns is essential for its continued success. But a financial return alone is not enough to keep in check the dynamics of a family-owned business. It doesn’t matter the size of the business or its profitability, the human element, if unattended, will decide the ultimate destiny of the business.

Recommendation: A family-owned company is not just a business, it is a family business. To be successful, the business and the family must both be managed.

My Advice: Don’t wait! Sit down with your family and begin to address the family aspect of your business. America’s financial recovery is counting on you to succeed and prosper.

 
Joseph-A.-DudaJoseph Duda is the retired CEO and currently serves as the Chairman of the Board for A. Duda & Sons and is the retired president and CEO of The Viera Company.

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