Every business, no matter the format or industry, faces several challenges from time to time. There are problems related to securing capital, talent acquisition, team training, cash flow issues, increased competition, market fluctuations, consumer spending, and consumer behavior changes, to name a few. But when it comes to a family business, there is an extended list of unique difficulties owing to family dynamics. In a family business, business decisions and emotions often intermingle, much to the team and the company's detriment.
Therefore, a sound understanding of the subtleties and nuances of how a family business operates can help put actions and strategies in place to overcome challenges proactively and avoid any future conflict.
Our TAB members have worked with many family-owned businesses, so we asked them to give us their insights into the common challenges every family-owned business faces (and what to do about them).
Here's what they shared with us.
#1 Offering fair treatment to the children working in the business versus those who don't
Although it isn't a challenge facing every family-owned business, for most owners, there is an issue regarding fair treatment of children working in the business and those who chose to pursue a different path. Those who work in the company feel their sweat equity should be considered outside the parents' estate distribution. Often, one parent wants to divide all assets equally, regardless of where the children work. Sometimes a parent thinks they should gift the business to the employed children, and only the balance of the estate is divided equally without any adjustments for the business value.
Both approaches are problematic. In the first, there is inevitable resentment as a child or children grow the business and have to share profits with those who haven't contributed. In the second, the children who are not a part of the family business see what is usually a substantial percentage of their parents' net worth subtracted from their inheritance.
A solution that often works involves a few steps. First, the employed children can be sold or gifted a portion of the business appropriate for their contribution, but not the whole company. Then the balance can be divided equally, with the non-employed children signing an agreement to sell to the employed children immediately upon receipt at the same value, usually with an installment note.
All children get an equal share of what is left after the equity recognition for services. The non-employed children sell at the same value as received, so they have no tax liability and convert the value of their illiquid inheritance to cash. The employed children pay a fair price to their siblings for past value and give 100% ownership of any future benefits.
#2 Ownership distribution decisions between contributing and non-contributing members of the family
Here’s a famous quote: "In recorded history, no owner has failed to exit their business." If your exit planning involves estate planning, when decisions regarding ownership distribution are decided, consider how to differentiate the contribution made by family members who play an active role in building company value versus family members who are not involved. There are proven methods and experienced professionals who can help you determine an approach that will keep the peace at future family Thanksgiving dinners.
#3 Reluctance to hire outside the family
One challenge is the unwillingness of family business owners to bring onboard professional managers from outside the family. At some stage, the business will grow to a point where the family members don't have the skills or experience to manage the additional complexity, and it's time to bring in outside expertise such as accounting, finance, or human resources. Otherwise, it will be challenging to take the business to the next level.
#4 The struggle to separate family and work
Family-owned businesses face many challenges that other companies do not. I am choosing to discuss communication since it is paramount to the success of every business. Communication in a family business brings the baggage of familiarity and the opportunity of never-ending shop talk; both are a source for conflict just because it is happening and not necessarily because of the content.
Family business communication tends to cause personal life and business life to bleed together. This could mean never-ending work and the absence of personal space/life balance.
In my experience working with family-owned businesses, one of the antidotes for improving communication is establishing a firm boundary. Set a boundary that is physical when you are not at work. For example, no shop talk unless you are in a specific room in the house. In other words, the dining room is out; the kitchen is out; the living room is out; and so is the bedroom. Ironically the family room could be the choice venue where a business-related "meeting" can be called and held.
A firm boundary surrounding a physical room creates an intention, and buy-in from all parties, regarding having a business conversation outside of the business. Not only will this make meetings intentional, but it will support the much-required family time and work/life balance we strive for and need.
#5 Succession planning
Family businesses need to have a well-defined strategy and plan to pass the company on to the next generation. One of the common problems to overcome is making sure the business's heirs and leaders understand their roles clearly. They must be educated well enough to lead the company toward profit and growth. They should make sure the legacy is well defined and that agreement on this critical issue is solid. If the family heirs can work their way up the organization chart, the better it is when the time comes for them to take over. If third-party help is needed to facilitate this effort further, there should be no hesitation in securing help and assistance to make sure the company moves on successfully."
#6 Compensation disputes
Family business owners often find themselves dealing with compensation disputes. These disputes might involve salaries, bonuses, commissions, paid time off, even ownership shares. These disputes might include family members and non-family employees.
It's important to remember two critical factors when working through these issues.
- Make sure the appropriate compensation vehicle matches what is being compensated.
As an example, sales are usually compensated with appropriate commissions. Year-end goals being accomplished are usually incented and paid with a bonus. Do not make the mistake of offering ownership for "sweat equity" if you can avoid it.
- Make sure you compensate everyone fairly.
While there is a lot of "subjectivity," there is also plenty of "objectivity" for you to leverage. As an example, you may have multiple people doing the same job. Also, you can quickly obtain average salary information and total compensation packages for specific jobs and roles via the web or from an HR/staffing professional.
Tenure, loyalty, experience, education, knowledge, performance, results, and many other factors influence compensation and fairness. In the end, you, the owner, must distill all this information down into what is needed, valuable to the business, and worth what compensation. The information you need to make these decisions is obtainable, so gather it, discuss it with a trusted advisor, make the best decisions you can, and revisit them as required.
#7 Unclear roles
Roles can be very confusing in family businesses, so lay particular emphasis on making them explicit. The clarity in operational roles will assist everyone in knowing what decision-making capabilities they have. Define each role's accountabilities and discuss it in the leadership team so that everyone is in sync. Then, ensure that the leadership team reinforces whatever is agreed upon so that every role is respected and can contribute value to the organization. Another helpful tip is to use a different name in the business than at family social gatherings. This helps everyone compartmentalize business and home and helps mitigate the tendency to talk business all the time.
#8 Bringing spouses into the equation
In the case of a husband and wife combination, it is not uncommon for the husband to be the boss on paper, but the wife is the go-to person for decisions as she is typically tied up in a bookkeeping/administration role and is in the office.
A lack of clarity around decision-making authority can sometimes lead to conflict between owners or, even worse, staff using the individual owners to get an answer that suits them.
Here's a solution: Owners must be conscious of staff manipulating them regarding decision-making and making sure there is clarity around roles and who can make what decisions. A "Delegated Authority Policy' document within a business has some merit.
As a suggestion, if this is a problem in your business, give some thought to having owner decision-making undertaken that day as an informal agenda item for owners when they sit down at night to review the day's activities over a beer or a glass of wine.