Family businesses spanning successive generations have existed for centuries, from farms, to trades, to shops, to specialized services. “Mom-and-pop” enterprises operated by a few relatives are the emblems of this kind of company, but not all family businesses are small. The scale of these operations can vary from “Jones & Son” to multi-million-dollar corporations.
And taken in aggregate, they saturate the business market. According to the U.S. Bureau of the Census, about 90 percent of American businesses are family-owned or controlled. In addition, these operations account for half of the nation’s employment and Gross National Product. In an era where large, bureaucratic companies dominate the news, family businesses sit quietly at the head of the table.
As with any family, family-run companies are complicated. The intricacy stems from the blending of two systems: the business itself and the people related to each other who run it and work there. In addition, family members who have a stake in the company but aren’t staff create more layers of complexity.
Familiarity, shared values, and trust can give family members running a business a significant advantage. But conflicts can flare up with the overlapping of familial and company roles. These pros and cons affect every decision, from daily operations to long-term goals.
In particular, family businesses grapple with two primary issues:
If they want to prevail beyond one or two generations, these nuclear organizations must find ways to manage these challenges.
Usually, only a few people create a family business. Their shared vision, principles, trust, and understanding form the heart of the company. As the enterprise builds steam, they may begin to bring other family members who adhere to and want to maintain what the founders launched. But the wider the family circle, the harder it is for the company to maintain that equilibrium.
Family businesses can be comprised of combinations of relatives in various business positions. The composite can include spouses, parents and children, in-laws, extended family, and multiple generations with roles that range from CEO to intern. How they interact personally and professionally often dictates the level of success the organization can achieve.
Relatives who become part of the family business, but lack the qualifications, pose a problem. Regardless of how much the company means to them, they limit its progress and are poor brand ambassadors. And both related and non-family staff resent these underperformers in the organization.
A strict policy of only hiring people with legitimate qualifications to fill existing openings can help a company avoid such problems. But this tactic won’t work unless leadership applies the policy without exception. Qualifications should be non-negotiable.
But not every subpar family staff member is a new hire. Company leaders already dealing with relatives who can’t pull their weight should work to find win-win solutions instead of living with a bad situation. For example, they might offer additional training to help the individual develop a useful talent. Or both parties could work together to identify a compassionate off-ramp that is in everyone’s best interest.
Even family members with appropriate skill sets can disrupt the company if their behavior clashes with the prevailing work culture. And once hired, family members are difficult to terminate, even if they negatively impact the morale of those around them. Companies that stick with a toxic employee, whether they’re related or not, often lose other talented team members as a result.
Without specific measures in place, it can be difficult to know how a family member will act until after they’re on board. So company leaders need to be proactive to prevent potential bad fits. The most effective way to do this is by formally defining and reinforcing the culture they want in their organization.
In the beginning, the culture of a family business mirrors its founder’s spirit. Close relatives who initially join the company are usually compatible with “the way things are done around here.”
But as the organization grows, alignment with the originator’s ideology and work ethic can become less distinct. And the original culture can change dramatically with the introduction of extended family and younger generations. A diversity of perspectives can greatly enrich an organization, but only if everyone shares the same standards.
A leader can create a blueprint that can be used as a hiring barometer by intentionally developing their company’s culture. The first crucial step is identifying and defining the employee behaviors that will preserve and promote the company.
When these behaviors are spelled out, it’s much easier for the leader and relative seeking employment to determine whether they’ll sync with the organization and can be successful there. Without that kind of transparency, the leader is more likely to act out of sentiment, allowing family ties to blur good hiring judgment.
Proud founders often envision their family businesses enduring through the decades. But if the past two years have taught us anything, it’s that circumstances can rapidly change. To be resilient, family businesses must not only develop a strategic continuity plan. They must also have a straightforward course of action for who will be next in line to lead.
Working out who will take the reins in a family operation can be more complicated than one with a strictly business hierarchy. Delicate family dynamics might explain PwC’s survey finding that only 34 percent of family-owned companies in the U.S. have a solid succession plan. There are various reasons that founders or current leaders are reluctant to formalize this critical part of a business plan:
Still, for family businesses to last longer than one or two generations, it’s critical for family business leaders to make succession planning a priority. As Amy Castoro and Fred Krawchuk, the authors of the Harvard Business Review article “Plan a Smooth Succession for your Family Business,” point out:
“The lack of a transition plan can create havoc for a family business when, for example, a founder suddenly suffers a medical limitation that impairs their ability to function optimally, or the next generation throws in the towel because they don’t feel included in the future growth of the business.”
Castoro and Krawchuk go on to outline several essential points to help families effectively transition to new leadership:
Agreement about the value of the company’s culture is one of the key elements in a successful transition of control. The change is much smoother when current and future leaders are in solidarity about the behaviors that should guide the company. As time goes on, different people will assume leadership roles. But the culture is the thread of continuity that will bind and preserve a family company for generations to come.