As a consultant, I am continually being told by people in family businesses that they are unsophisticated and that their lack of expertise on many business matters is hurting them. I disagree. The main thing that is hurting family businesses is the family.
A Quick Overview of Family Businesses
WHAT IS A FAMILY BUSINESS?
This book uses a simple definition of a family business: Any instance in which two or more people from the same family work together in a business that at least one of them owns. It may be a combination of husband and wife, father and son, brothers, dad and his distant cousins, and so on. This definition is used because anytime family members work together they face a unique set of problems.
HOW MANY ARE THERE?
Family businesses are the greatest stealth phenomenon in the U.S. economy. Accordingly, statistics for these businesses are fuzzy. The federal government does not track "family business" as a category in its census data. You can obtain information on the relative size and number of businesses, business ownership by ethnicity, number of home-based businesses, and so forth. But there's no straightforward count of family businesses.
Some estimates state that there are more than 12 million family businesses in the United States, while others are that family businesses:
- Make up 75 to 95 percent of all U.S. companies
- Generate 40 to 60 percent of gross national product
- Represent more than half of all wages paid
- Make up one third of Fortune 500 companies and almost two thirds of all companies traded on the New York Stock Exchange
Family businesses are the major force in our economy. Instead of focusing on quarterly earnings estimates, unemployment statistics, or the Dow Jones Industrial Average, the business media should focus on family businesses, since the health of family businesses affects and reflects the health of our economy.
MOST OF THEM DON'T SURVIVE
The probability that a family business will survive long enough to be handed to the next generation is not great. Consider these statistics:
- Approximately 30 percent will survive to the second generation.
- Only 10 percent will survive to the third generation.
AND SOME BIG CHANGES ARE IN STORE
In the next five years, approximately one third of family businesses will undergo succession -- that is, control of the business will pass from one family member to another. Most of these businesses will face serious problems during succession, and many of them won't survive. Even those businesses that survive succession don't necessarily thrive and may not survive long enough to be handed over to the next generation.
It Ain't Easy Being a Family Business
There is an almost universal misperception that people in family businesses have it easy: they own their own business, automatically get jobs, and don't have to worry about losing their jobs in a downsizing.
THE MULTIPLE BURDENS FACING PARENTS IN A FAMILY BUSINESS
The owners of a family business are often the parents. As such, they have to contend with the stresses and strains of running a business and raising children.
An owner has to keep the business viable. The owner's economic survival is usually dependent upon the business. But since it's a family business, the family that's dependent upon the business is not necessarily restricted to the nuclear family. Children, aunts and uncles, cousins, and stepchildren may all be dependent upon this business for a paycheck.
In addition to short-run economic survival, a family business often represents a legacy to be handed down to succeeding generations. This adds pressure to keep the business viable beyond its value as an economic asset, as a valuable part of the family's heritage.
Employer to family, extended family, and nonfamily members. The owner is an employer and thus must perform many traditional supervisory tasks. What makes this tricky is the diverse cast of characters who are employed, often ranging from immediate family members to complete strangers. How can these supervisory tasks be performed in a way that is fair to all?
Family-business owners must maintain an environment that promotes fairness to all; otherwise there is the danger of giving preferential treatment to family members. Besides decreasing the motivation of nonfamily employees, in our lawsuit-happy world it raises the specter of being hit with a labor grievance.
Being a parent. In addition to running the business, the owners are also supposed to raise their children. When do the parents find the time to be parents when they're consumed with running the business?
If their children are to grow into healthy adults and enter the family business (or go to work anywhere else, for that matter), they need to learn a series of business skills and character traits that require the active tutelage of their parents.
Being a spouse. Marriage is supposed to be a partnership, and when a family business is involved, it's not uncommon for the partners to become coworkers. How can you maintain a vibrant and healthy marriage when you're forced to spend your working hours confronting the countless pressures presented by running the family's business in addition to the normal pressures of raising your family?
HOW MANY HATS CAN ONE PERSON WEAR?
In most situations you're deemed to have a mental illness if you have multiple personalities, yet if you work in your family's business you're forced to have multiple identities and people expect you to be sane. But how sane can you be when you are forced to embody at least two of four separate and distinct identities, and each of these identities creates conflicting demands?
There are three things to remember when examining Figure 1. First, every family member who is involved with the family business is wearing at least two hats. Everyone wears the hat of a family member, plus whatever other hat or hats his or her business involvement dictates. Second, each role provides a different perspective on the business, all of which are correct. Third, the perspective for each of these identities is usually very different. This multiplicity of roles and perspectives can create confusion, conflict, and tension.
Family member. Family membership is automatic, so whether they want it or not, any family member working in the family business automatically has this identity. But the roles and responsibilities of being a family member do not have anything to do with running a business. In fact, these roles and responsibilities often get in the way of running an effective business.
Owner. A person with an ownership interest looks at the business from the perspective of someone with an asset to protect and to derive profit from. But there are varying types of ownership, and each of these can create a differing set of problems.
A person's ownership interest might involve active control, or it might be a limited or passive investment with no control over the company's operations. Owners lacking formal con-trol may create conflict when they try to influence the business by exerting pressure on the family members who do have control of the business.
In addition, if an owner does not work for the family business, his or her perceived economic benefits from ownership might be very much at odds with those of people who draw salaries from the business. One person will be arguing for dividends while the other says that profits need to be reinvested.
Manager. Although in the abstract, appointment to management should be based on merit, many families put family members in management without regard to aptitude, creating tension between competent and incompetent family members (as well as competent employees and incompetent family members). In addition, family members who are managers may have conflicting business priorities that spill over and create tense family interactions.
Family members who manage the business may be in conflict with those owning it, especially when those responsible for running the business do not have sufficient power to take the actions they want.
Employee. So what happens to family members who have been relegated to employee status? How do they react, knowing their family's name is on the door yet they've been relegated to worker bee?
Lacking ownership or management power, these employees often resort to "The Whine Factor" to overcome a lack of formal authority. They will exploit their membership in the family, whining as loudly as possible to try to exert informal control over business activities. Their failure to contain themselves within a limited business role creates conflict.
WHY WORK IN A FAMILY BUSINESS?
To carry on the family tradition. The family takes great pride in its business, and it's an important element in defining who it is. As such, family members feel it's their duty to enter the business and keep it running.
It's a matter of destiny. Each family has its own set of beliefs, and when a family owns a business, this often includes a belief that family members are supposed to work for it. The children are often taught that their destiny is to eventually succeed their parents in the business.
There's a lot more freedom than in working for a big company. Many people think that working for a big company is repressive -- and they're right! They believe that working in their family's business will provide them with greater responsibility and authority, the opportunity to learn and handle diverse roles, and the ability to have a much larger impact than if they were just another employee at a big company.
The business helps unite the family. Some families truly enjoy being a family. What better way for the family to face the challenges of the world than to rally their strengths behind the family business? These families believe that running the business provides a forum to promote family closeness.
ADVANTAGES OF EMPLOYING FAMILY MEMBERS
Family members are more likely to "fit in." Every business has its own culture. In a family business, this culture usually reflects the family itself. Employing a family member means employing someone who already fits in. This person will likely share similar values, beliefs, and attitudes with both the family and the employer (since they're the same). Because family businesses are often quite small, compatibility is important.
They're more committed to the business and its success. Family members are often aware of just how much their family depends upon the business for its livelihood. They also understand just how devastating the business's failure could be to their family. This desire to protect the family's economic livelihood -- if not the family itself -- helps commit them to the business's success.
An emphasis on relationships. Family members usually feel a strong bond with their family's values and traditions and will work to maintain these within the business.
Values and traditions found in family businesses often include a strong desire to develop and maintain close relationships, and when this involves customers, it usually helps to create goodwill. Research has shown that many customers actually prefer dealing with a family business because of this goodwill. Family members are also more likely to be protective of the family's name and reputation, helping to maintain the business's goodwill.
POTENTIAL DRAWBACKS OF EMPLOYING FAMILY MEMBERS
Competency is not included in the manufacturer's warranty. Hiring someone based solely on his or her status as a family member fails to address the issue of whether this person is competent or not. If the business must hire someone from within the family, it might be choosing the lesser of two evils rather than finding the best possible candidate.
Even if some family members are competent, there's no guarantee that the hiring individual will be able to determine who they are because it is often difficult to obtain honest or accurate feedback regarding the candidates' potential. Nonfamily employees within the business may be fearful of giving honest feedback because they may be criticizing someone who is both a family member and a potential future boss.
"The Family Ceiling." Women in the corporate world have long known that there's a "glass ceiling" -- an invisible barrier that prevents their rising above a certain level within companies. Ironically, there's an identical barrier facing nonfamily employees who work in family businesses. I call it the "family ceiling." It's a very real barrier that few nonfamily employees will ever pass.
Family businesses usually reserve the top positions for family members. I'm not saying that this is wrong. After all, the business is owned by the family and it's their prerogative. But reserving the top positions for family members does not guarantee that the most competent people in the organization will be at the top. In addition, nonfamily employees who are talented will be forced to go elsewhere if they want to attain a top title.
If you think it's hard to fire a civil servant, try firing a family member. A family member working in a family business possesses a unique weapon against getting fired: family membership.
Firing a family member involves more than firing the person. It can create a family incident that disrupts the entire family as the person being fired turns to other family members for protection. Just imagine the dinner table during the next holidays, when the fired family member sits next to former coworkers.
Copyright © 2000 by Quentin J. Fleming
Avoiding the Seven Deadly Sins That Destroy Family Businesses
Keep the Family Baggage Out of the Family Business
Avoiding the Seven Deadly Sins That Destroy Family Businesses
In Keep the Family Baggage Out of the Family Business, family business expert Quentin Fleming has identified the Seven Deadly Sins that are invariably responsible for a family business's demise. Keep the Family Baggage Out of the Family Business presents practical and accessible advice geared toward the average family business owner or employee and is an invaluable tool for helping family businesses not only survive but thrive.
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