Home Best Practices Thinking of starting a family business? Better think twice.

Thinking of starting a family business? Better think twice.

In a recent edition of the Daily Herald’s Business Ledger, the focus was on family businesses.  More specifically, the focus was on succession planning so that the business could remain in the family and continue to benefit family members for many generations.  One of the stories discussed Klein Tools, a business that has been in the Klein family for six generations.  I myself am the product of a successful family business.  My grandfather, Sam Dean Sr., founded Dean Milk Company (now Dean Foods) in 1927.  Members of the Dean family would remain in the management of that company for the next 75 years.  So family businesses can be successful, and when they are, their stories can be both inspiring and heart-warming.  Unfortunately, those kinds of family success stories are few and far between.  In fact, most family businesses don’t survive through a third generation.  So if you’ve got a romantic notion about passing your company on to your kids, grandkids, great grandkids, and beyond, you might want to revisit that notion.  It’s a lot tougher than you might think.  For more on this, please read below.

Thinking of starting a family business?  Better think twice.

A family business can be a positive thing . . . the thread that binds the family together.  It can keep the family focused on a common activity and a common source of wealth.  But in many cases, it’s just the opposite.  It can become a divisive force, full of strife and contention that drives family members into separate warring camps.  Consider a few case histories.

Case History #1.  A father and son are at odds over the family business.  The plan has always been for the son to take over the business “someday,” but in the son’s view, that day shows no sign of arriving anytime soon.  “Times have changed, but my dad has his head in the sand and won’t face the challenges in front of us.  He’s never going to retire.  He’s going to stick around to make sure we continue to do things his way and to make sure I don’t have a chance to make any changes.”  But from his father’s point of view, “My son needs more seasoning before he’s ready to run things without me.  He’s immature and reckless.  He wants to fix things that aren’t broken . . . take unnecessary risks.  This is my company and I’ll decide when he’s ready to take over.”
The tension at work is palpable.  The father and son communicate by texting or email, but they rarely speak.  Employees are choosing up sides, trying to decide which camp they should be in.  Too bad for this family.  Although it wasn’t their intention, they traded what had been a good father/son relationship for a rancorous business relationship.

Case History #2.  Two siblings, a brother and a sister, are working in the business.  The brother is older than his sister, has worked in the business longer than his sister, and believes he should be the heir apparent.  However, by any objective measure, the sister would be the obvious choice.  She’s smarter, has significantly higher emotional intelligence, and has shown much better leadership skills than her brother.  So what should the family do?  If they give the brother a shot at the top spot, they risk the health and welfare of the business.  If they promote the sister over her brother, they risk alienating her brother and his wife and kids from the rest of the family.  Either way, Thanksgiving dinners aren’t going to be a lot of laughs anymore.

Case History #3.  We’ve got a number of family members in the business who consider their jobs to be entitlements.  We’re paying them more than they could earn anyplace else because, afterall, they are “family.”  And no one has the stomach to fire them because they all have dependents who count on them for a paycheck.  Besides, firing family members would wreak all sorts of havoc with extended family members who would demand to know how we could possibly fire good ol’ Uncle Charlie.

And these are just the sticky relationship issues that family businesses may encounter.  We haven’t even touched on the financial ramifications of a family business such as how stock is distributed, when and how dividends will be paid, etc.

There are two take-aways from this.

First, don’t be seduced by the romantic notion of a family business.  Yes, it could turn out very successfully as it did for the Kleins and the Deans and scores of other high-profile family businesses.  But it could also go the other way.  There’s no getting around it, a family business puts family relationships at risk, so if you’re going to commit to building a family business, you have to acknowledge and accept that risk.

Second, recognize that there are costs associated with a commitment to a family business.  To give your family a fair shot at success, you’ll need the help of financial and legal advisors who are experienced with family businesses and can help you avoid the financial, organizational, and succession planning pitfalls that await you.  These, of course, are costs in dollars, but there will also be a significant cost to you in terms of your time.

Consider carefully if building a family business is the right decision for you, and if it is, commit the time and resources to do it right.

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