Family businesses are quite common in the US and especially in the juvenile products industry. They can ultimately become extremely successful and very beneficial for both the founders and the extended family. But as a battle-worn veteran of the family business experience, I can tell you there are some unique challenges that need to be anticipated and managed carefully.

What is a family business?

Inc. Magazine defines it as “any business in which two or more family members are involved and the majority of ownership or control lies within a family.” 

Surprisingly, according to the U.S. Bureau of the Census, about 90 percent of American businesses are either family-owned or controlled, ranging in size from two-person partnerships to Fortune 500 corporations. Many have multiple family members working for the company. But, for reasons that may become obvious as you read this post, some actually prohibit or minimize family member employees even though members of a single family own the controlling shares.

What potential advantages do they enjoy?

Once properly established, a family business can enjoy several advantages over non-family companies. This can benefit not only family members inside and outside the company, but also non-family employees and overall company performance:

Clarity of mission and culture

There is more likely to be a sustained mission and well thought out culture that facilitates long-term financial success. It’s often based on the original founder’s vision (Walmart and Disney are notable examples).

Commitment to success

Family members are typically highly committed and loyal to the company providing an extra level of continuity and stability (i.e., they are unlikely to leave and go to work for the competition). This is especially important when economic times are tough.

Long-term perspective

Family leaders see their enterprise and wealth as gifts to later generations which fosters careful long-term planning as opposed to a short-term quarter-to-quarter focus.

Family wealth creation

A family business provides a mechanism for an entire extended family to prosper over an extended period of time.

What unique challenges do they need to deal with?

Only about 13% of family-owned businesses are passed down successfully to a third generation. Sometimes, as was the case for my company, the family just decides it’s the right time to sell. But often it’s because of one or more of the following issues:

Conflicts between family employees

Friction between employees is common in every company. But when family members inside a company are at odds, it can be much more disruptive and ill feelings can spread to other family members.

Differences of perspective between generations

Understandably, next generation successors are likely to have a different viewpoint from their older predecessors. Since family company leaders tend to stay around even if their role changes, this can be a source of ongoing tension and internal confusion.

Nepotism

If family connections take precedence over business considerations with respect to hiring decisions, compensation, roles, and other personnel matters, it can be demoralizing for both family and non-family employees and destructive to business performance.

Poor or no succession planning

Family business leaders can be particularly negligent when it comes to planning for leadership transitions. This could be from an inability to confront life’s realities, a reluctance to offend family members not chosen for leadership positions, or simply procrastination. The result can be chaos if a sudden death or disability catches the company unprepared.

Risk Aversion

A downside to the natural desire family companies have for financial stability and wealth preservation can be a reluctance to take reasonable, desirable strategic risks. Companies that aren’t changing as the world around them changes aren’t likely to survive long-term.

Loss of Objectivity

Continuity of leadership and culture is a positive. But there’s a risk that family leaders may become victims of “drinking their own Kool-Aid.” If insulated from outside viewpoints they can lose touch with reality and make serious strategic errors.

What are the best practices of successful family businesses?

Enlightened family companies put in place policies and processes to overcome or minimize these challenges as much as possible:

Prioritizing business success and profitability

To be successful, a business must be run as a business. Everyone needs to understand that it’s a meritocracy. That means that family and non-family employees should be absolutely treated alike. Compensation and promotions should be based on performance. The best person for the job should get the job and poor performers, even if family, should be encouraged to go elsewhere.

Maintaining an ongoing strategic planning process

It’s particularly important in a family business to have a well-designed process for periodically reassessing the internal and external environments, monitoring progress, and updating goals and strategies. Making this as transparent an exercise as possible also provides clarity about future plans to family and non-family employees and non-employee family shareholders.

Having a documented succession plan

Not having a well thought out succession plan in place has been the cause of demise for many a family company (just watch the HBO TV series to get a sense why). A plan needs to be in place long before it is needed, and reviewed and updated periodically as necessary. It should address how emergency fill-in situations will be handled as well as how future leaders will be selected and trained.

Establishing and enforcing core values

The attitudes and behaviors expected from employees and what’s not acceptable ought to be carefully spelled out. And adherence should be enforced evenly for both family and non-family employees. The company values should ideally be compatible with the family’s own personal values and could address things like teamwork, customer service, quality, continuous improvement, integrity, self-development, transparency, accountability, and community relations.

Leveraging outside expertise

Whether it is company lawyers, accountants, or a board of advisors, the involvement of respected, independent, non-family members can serve at least two purposes. First, by providing an outsider’s perspective, they can counter the tendency for company leadership to lose objectivity. This is particularly true regarding strategic or governance issues. Second, they can act as mediators to help resolve disputes between family employees without creating in-family resentment.  

Developing next generation talent

To accomplish the difficult task of sustaining a multi-generational family business, care must be taken to acquaint the next generation with the business early and assess the interest level and likely fit of potential future leaders. It’s also a good practice, if possible, for potential family employees to first work for another company for a year or two to gain perspective on what things are like in the “real world.”

Next Steps

Building a family business can be a very rewarding undertaking that can benefit an extended family for generations to come. But there are differences between family-owned and non-family businesses that require special management skills and practices beyond what is typically taught in business schools. 

As always, if you’d like more information or assistance regarding achieving your business and life goals or you just want someone to brainstorm, vent, or commiserate with, consider taking advantage of JPMA’s Executive Mentor Program by scheduling a free videoconference session with me. I’d enjoy meeting you and helping you any way I can. Check the JPMA web site for more information or contact Kim Libucki at klibucki@jpma.org.

Ron Sidman was the founder and CEO of The First Years, Inc., and former Vice Chairman of the JPMA Board of Directors. He is currently a business consulting resource for JPMA members and serves on the Advisory Board of the School of Entrepreneurship at Florida Gulf Coast University where he also mentors students. Ron is also the founder and CEO of Evolutionary Success, LLC, a life, and business coaching company.