There is no fixed definition of a family business. Some consider it a family business if more than one member of the owner’s family works there, or if a single family wields a dominant influence. Others consider it a family business if the business itself says it is.
In any case, family businesses face unique problems in remaining family businesses. Studies show that only about one in every three will survive into the next generation.
Henry Hutcheson, founder and President of Family Business USA, grew up working for his family’s business – Olan Mills Portrait Studios. In 2011 the company was sold after nearly 80 years of family ownership. Now Hutcheson helps other family businesses improve operations, plan for transition and strengthen family relationships.
With decades of family business experience, Hutcheson has identified the key strategies that have helped the best family businesses survive and thrive. Here are six keys to making that happen.
1. Focus on professionalism: Some families forget that any business must operate effectively and professionally in order to survive. In the early stages, many family businesses operate more loosely. The operating “rules”, for example, may simply be in mom or dad’s head. But as it grows, the business needs to be more professional. It must hire and promote employees (family members or not), hold regular meetings, produce accurate financial statements, and have some sort of outside, non-family advisory board.
2. Open and regular communication: Family businesses often implode due to poor communications. At a minimum, says Hutcheson, every family business needs to hold regular business meetings, practice active listening and develop its own family business code of conduct. Meetings should be proactive, and cover topics such as business performance and transition. Many multi-generation family businesses consider communication the single most important ingredient for success.
3. Clearly assigned roles and responsibilities: Family members often feel a natural tendency to be involved in everything. But “everything” is not an appropriate responsibility. Without clearly defined roles, family members can duplicate efforts and cause friction. Make sure each person knows which decisions he or she is responsible for, and which things require more collaborative action by the family as a whole.
4. Accurate and transparent financial records: A lack of solid data or accurate financial information has been the downfall of many a family business. It’s especially vital if the business needs to raise capital or operates in a fast-growing industry. Accurate financial data and revenue projections are vital for planning purposes. Otherwise you don’t know if the business will have money to invest – or needs to go on a spending diet. Says Hutcheson, “Good financial data is like a clean windshield: It lets you see exactly where you are.”
5. Market-based compensation for family members: Family businesses must avoid over-paying family members. Market-based compensation is fundamental to long-term success. But parents in a family business tend to either over-pay the next generation, or simply pay the same, regardless of responsibilities. Both are bad practices. Unfair compensation practices can also cause discontent among non-family employees, and are harder to correct the longer they persist.
6. Business-based hiring practices: The basic rule is this: Don’t hire relatives unless they are qualified for the job. Competence is the key, says Hutcheson. The remedy for unqualified family members is to get them trained, move them to a role that matches their skills, or have them leave.
For more information on family businesses, these resources can help:
- The Family Firm Institute (www.ffi.org) provides research-based learnings and tools for advisors, consultants and family enterprise members to drive success.
- Dirty Little Secrets of Family Business (2014, Indie Books International), by Henry Hutcheson, offers advice on how to successfully navigate family business conflict and transition.
- FamBiz.com is a helpful website for family business owners and executives that offers the latest family business news and research articles.
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