Four Tips on Making a Family Business Survive — and Thrive
Family businesses face unique
challenges and have unique opportunities.
Consider that less than 30 percent
of family businesses survive into the third generation of ownership, yet those
that achieve this milestone outperform their non-family owned peers. Simply
put, the family relationships that can enhance commitment to an enterprise and
contribute drive to the mission can also get in the way of sound business
Some of the most respected global
companies are family owned – BMW, Samsung and Wal-Mart to name a few, along
with one-third of all the companies in the S&P 500 Index. Among the more
than 42,000 businesses in Baltimore are many well-regarded successful family
enterprises. Some of these are clients of mine whose sources of satisfaction
and frustration with their businesses often come back to family relationships.
The family aspect of the business is
like a multiplier effect. When family relations are harmonious and business is
going well, the shared sense of accomplishment is profound. When problems
arise, these too are amplified by the complexities of the family.
Even though family businesses span
all industry groups and range in size from sole proprietorships to global
giants, the successful ones share some key attributes, just as those that fail
do. Four characteristics separate the winners and losers.
Strong business governance is a key
to success. Many family businesses have boards of directors made up of only, or
a majority of, family members. Some family businesses ensure more balanced
boards of directors through policies limiting the number of family directors,
or compliment their family board members with non-equity holding directors. If
the governance structure doesn’t allow for outsiders on the board, setting up
an advisory committee to the CEO made up of outsiders with fresh perspectives
and expertise can help offset this limitation.
One of the most common reasons
family businesses fail is that they fall into the trap of “management by
inheritance, not competence.” Confronting family members with shortcomings is
tricky business, and family members in executive positions often avoid these
conversations, or have them but have differing assessments of family members’
Polices that enhance meritocracy can
help by setting parameters. For example, some companies require family members
to get experience outside of the family business before working for the
enterprise, and also require that any family member appointed to a management
position has to meet the same criteria for the job as an outsider would. Having
outside directors or advisers involved in the process can enhance objectivity
in selection decisions.
Infighting over succession is a
particular problem best addressed by professional management practices,
including the application of selection criteria that would be used by an
executive search consultant. A simple test when confronted with performance
issues caused by family members is to ask yourself, “What would I do if this
person was not related to me?”
A third attribute shared by
successful family businesses is that they have well defined processes for
balancing the capital needs of the business with the family’s cash needs.
Ownership decisions are governed by long-term shareholder agreements that
stipulate how shares can and cannot be traded. Many successful companies have
“ladders” of relationships built into their buy-sell agreements that give
siblings right of first refusal, followed by first cousins, and then others.
Occasional “liquidity events” can satisfy the needs of one generation
transferring out of the business while passing ownership to the next
Finally, family companies that have
long-term survival rates do a good job of insulating business decisions from
personal financial issues through professional wealth management. In the case
of families with substantial wealth this often takes the form of a family
office, but less wealthy families can benefit from professional management of
assets outside of the business through a wealth management firm.
Because family owners most often
have a substantial portion of their wealth tied up in their business, they need
to check their own tendency for risk aversion when making business decisions
and have personal financial plans to compliment their business plans.
A little attention to good
governance, a focus on merit, using objective outsiders and having structures
to meet family financial needs apart from the capital needs of the business can
go a long way to ensure that your family business ends up in the survivors’