If you own or manage a family business, you're in good company. Family businesses are a major part of the United States economy. Eighty percent or more of all businesses in the United States are family controlled. Furthermore, over 60 percent of the U.S. workforce works for a family business. Yes, family businesses embody our country's entrepreneurial spirit and represent the hopes and dreams of many for independence, community, self-sufficiency, and wealth. Unfortunately, says Edward Hess, family business owners also face challenges that other types of businesses don't.
"The added complexity of family dynamics causes most family businesses to operate, to adopt strategies, and to make decisions differently from non-family businesses," explains Hess, author of The Successful Family Business: A Proactive Plan for Managing the Family and the Business. "Leaders of family businesses must learn the processes and attitudes that are needed to manage the family versus those that are needed to manage the business. You cannot manage both the same way. Families factor family needs, hopes, and fears into their decisions regarding the business, and only family businesses have sibling or cousin rivalries, jealousies, and competition for parental love, approval, and financial favor. Family dynamics, family ways of communicating, and making decisions all can interfere with business decisions. This is the beauty of and challenge of managing a family business."
Not surprisingly, the difficulties faced by family businesses often lead to their downfall. The success rates of most entrepreneurial businesses in general are poor. Estimates are that 70-80 percent of all private businesses fail during the first four to five years of existence and fewer than 10 percent last ten years. Family business statistics show that fewer than one-third of them pass successfully to a second generation.
So if you're the leader of a family business, how do you manage the complex interplay of family dynamics in a way that makes your enterprise successful? Good question, says Hess. The first order of business is to understand what success for a family business actually is.
"A successful family business is a successful business that does not destroy or lessen family harmony," he explains. "Successful legacy family businesses do not let the family destroy the business or the business destroy the family."
Hess adds that twenty-five years of working with family businesses has taught him there are five important rules leaders must live by if they want their business to last:
Your chances of having a successful multigenerational family business will be greater if you proactively and preemptively manage both the business and the family.
You need to accept the fact that there will be reoccurring family business issues - that is, family issues that will impact the business, or put financial pressures on the business, and business issues that will impact different family members differently. The issues will change as the family expands and as the family ages because family members' emotional and/or financial needs will change as their life circumstances change. These issues are predictable and occur in most family businesses.
You need an analytical framework or template that takes into account the differing, changing perspectives of the (a) business, (b) family, and (c) non-family member employees and shareholders, if any.
You need a process by which you can manage the surfacing of and the debate of family business issues.
That process should be based upon and reinforce the key values that are most important to you and your family. Family values will be an overriding factor in mitigating jealousies, rivalries, and personal financial self-interest.
A family and a business are two dynamic, evolving, changing organisms - each unique, each with its own history, challenges, strengths, weaknesses, opportunities, and threats. And a family business is the interaction of these two dynamic organisms.
"Family issues will interact with and will overlap with the business," promises Hess. "The family will impact the business. And because of that impact, most family businesses operate differently from non-family businesses. And the business will impact the family since family members' livelihoods, financial security, status, and community standing are derived from the business."
Here's the thing: families and businesses are rarely static. Something is always changing. Family members are aging - going to college, getting married, having children, buying homes, getting older, sick, divorced, etc. Likewise, the business is changing - new competitors, employees quitting, customers changing, growing pains, etc.
It's this constant change - the evolution of the family happening simultaneously with the evolution of the business - that creates a continuous flow of multigenerational family business issues that need to be managed in order to increase the probability of business success and family harmony.
Not only are family and business two different evolving organizations, each is made up of different constituents or members. Family members include the founders of the business, family shareholders, their children, their grandchildren, and spouses. Some of these people may work in the business and some may not; some may own stock in the family business and some may not. Likewise, the business will likely have non-family member employees and may have non-family member shareholders whose interests can impact the business and the family.
"The complexity of the issues and the different perspectives of individuals involved will depend upon their various roles in the family and in the business," asserts Hess. "It is these dynamics and these different perspectives that present the challenges of managing a family business."
Most family businesses face similar issues and challenges, Hess points out. And the issues and challenges are predictable as families age and grow. Four key management perspectives are:
- Your Mindset
- Understanding and accepting the fact that family business issues will occur, are normal, and will change as the business grows and as the family grows and ages
- Your Perspective
- Your way of thinking about family business issues, taking into account the different perspectives of different people
- Your Process
- The structure and rules you adopt to proactively and preemptively manage family business issues
- Your Family Values
- The values you are seeking to teach and preserve, which should override personal rivalries, jealousies, and personal financial self-interest
"My experience has taught me that multigenerational families can increase the probability of sustaining family harmony and the business's success if they proactively manage both the family and the business," concludes Hess. "Proactive management requires the creation and adoption of institutionalized processes and rules of engagement for the airing of issues and for the management of differences that will arise."
Edward D. Hess is adjunct professor of management and organization at Goizueta Business School of Emory University and is also founder and executive director of The Center for Entrepreneurship and Corporate Growth and The Values-Based Leadership Institute. He is the author of The Successful Family Business: A Proactive Plan for Managing the Family and the Business; The Search for Organic Growth; Leading with Values: Positivity, Virtue, & High Performance; and The Road to Organic Growth: How Great Companies Consistently Grow from Within. He has an active multigenerational family business consulting practice. For more information, visit EDH, Ltd..
