How To Solve The Toughest Family Business Problems

Family businesses enjoy many advantages: a shared joy of success, a common pride in tradition, and a stability and loyalty that's the envy of their clan-free competitors.

Even so, there's a flip side to the coin. Sibling rivalries, parent-child conflicts and charges of nepotism by a non-family staff can interfere with the smooth running of any family enterprise.

Has your own organization encountered such issues? Let's discuss how to solve three of the most common problems.

The Leadership Battle

Problem #1: The time has come to select a leader from the next generation. Several sons and daughters, now in their 40s, want to take charge. How do you avoid creating hurt feelings among the siblings?

Solution: "The transition to a new leader can be extremely difficult in a family business," says Stacey A. Lundgren, a former family business owner and now a consultant in Howell, Mich. "The decision needs to be made on job performance and on the duties that each sibling has taken on over the years."

While that's easy to say, the waters can be muddied by emotions as decision time approaches. "Be aware that this transition will affect the personal lives of the siblings forever, so they will be experiencing a lot of fear," says Lundgren. "There may also be feelings of greed if siblings are concerned with how many shares of the business each will have. And this can lead to feelings of resentment."

Interpersonal histories can also play a role at decision time. "So much depends on the dynamics that developed among the siblings when they were growing up," says Lundgren. "Bear in mind that even with grown children it is normal to compete for the parents' love and approval. When one sibling is chosen to lead, the other siblings can feel that person is loved more or is being selected for being smarter or more capable. That can create resentments."

Given the broad mix of emotions, it takes a tremendous amount of maturity by the parents to avoid arguments and hard feelings. Mom and Dad need to be very careful that they are not influenced by family events from the past that have nothing to do with the business.

Lundgren suggests taking these steps:

Hold a meeting to discuss the forthcoming transition. "Emphasize that you are holding a business meeting, not a social one, and remain as neutral and as businesslike as possible," says Lundgren.

Begin by stating the purpose of the meeting and emphasizing that the transition decision must be based on business criteria. Note the importance of leaving personalities out of the decision.

Then review the past jobs held by each of the siblings. "A review of duties can suggest a decision that is professional rather than personal," says Lundgren. "Who was doing the work that naturally produces a leader?"

Follow up by getting each sibling's thoughts on the best candidate. "Remind them that because the business will belong to all of them, they all have vested interests in its success," says Lundgren.

Do not make the transition decision at the meeting, unless everyone is in agreement, suggests Lundgren. "State that Dad and Mom will make the final choice and schedule a second meeting to announce the decision.

"Start the second meeting by obtaining feedback from the siblings," suggests Lundgren. "You might say something like this: 'I have come to a conclusion. That's my job as the owner. But it would be interesting to see if it is apparent to you what decision I have come to.' Why? "This shows respect for the kids. And it might be gratifying for the parents to see if the children agree with their decision."

Bonus tip: Stay involved with the business for a couple of years, suggests Lundgren. You can play a valuable mediator role.

The Nepotism Charge

Problem #2: Your oldest son John has proven his management capability at another employer. Now you want him to take an important executive position at your family business. But you are afraid to alienate your veteran non-family managers who may want that job.

Solution: "Everyone needs to see that John's assignment to the top position is the best decision for the business — not just the result of Dad being anxious to have his son join him," says Greg McCann, a family business consultant in Deland, Fla. "The question becomes: How do you set this up so people won't be saying, 'John was handed all of this?' Bear in mind that there is always a tendency under any circumstances for people to discount the efforts of the second generation."

How to proceed? One way is to have an independent board of directors decide on the assignment and hold John accountable for reaching specific benchmarks, says McCann. "A board can help give both the appearance and the reality of legitimacy, by requiring John to submit to a round of interviews and fulfill a job description."

Not all family businesses, however, have boards of directors. The reasons are many: Sometimes the founders don't want to cede control to outsiders. Other times the family wants to maintain the privacy of business operations and financials. And in other cases owners are uninformed about the legal intricacies of establishing a board or don't want the hassle of structuring one.

If your business is a case in point, consider establishing an alternative structure: a "board of advisors" consisting of independent non-family members who are not given any control. "A board of advisors avoids director liability while providing your business with ideas from experienced professionals," says McCann. "Their feedback can be very valuable." Seek out retired business people as members: They can bring experience to the table and may be willing to serve for very little money.

Yet another alternative is a "family counsel" composed of family members who desire a voice in proceedings. "The family counsel might help to formulate an employment policy," points out McCann. "For example, a prospective executive-level person such as John might be required to complete specific outside experience before joining the firm. Perhaps he must reach an executive level at another company — not just complete three years at a junior level — prior to joining the family business." While a family counsel is helpful, the downside is that no independent third-party individuals are included.

Despite your best efforts to establish a businesslike transition decision, veteran non-family executives may well feel upset by John's arrival. "Senior management may feel angry, confused, and even betrayed," says McCann. "It's critical to talk with everyone and get any issues out on the table."

If you see that senior executives are about to resign you need to deal with the problem before it happens, says McCann. One solution is to provide additional job security. An executive might be willing to work for your son, for example, if awarded a multiple year contract.

Bonus tip: Establish a "family employment policy" that mandates specific educational and performance goals prior to sibling employment or advancement.

The Reluctant Coach

Problem #3. Jane is a longtime employee with tremendous sales skills. You feel she would be a great coach for your child, Susan, but you are afraid Jane might feel threatened or even think she's training her replacement.

Solution: "Understand that Jane will be conflicted between the two primary emotions of elation and fear," says Tee Persad, a partner with the law firm of CPLS, PA, Orlando, Fla. "Initially, she will be flattered that she was chosen as teacher and mentor. However, it is likely that Jane will develop some degree of concern about being replaced and wonder if there is some ulterior motive."

How can you encourage Jane's cooperation without sparking anxiety? Be explicit in terms of how you anticipate utilizing the skills of Jane and Susan. By communicating your specific plans you will obviate any fears Jane may harbor.

Before proceeding, assure yourself that Jane is a good leader, cautions Persad. "Although Jane may have great sales skills she may not understand leadership and may need to acquire skills in that area."

Establish the parameters of the coaching assignment by identifying the skills Susan needs to acquire. "Make a concrete list," suggests Persad. "Then, let Jane know where Susan lies in terms of competence in each item on the list. Rank them in order from one to four, the first being the absence of any skill and the last being maximum competency."

Develop a plan of action which identifies what Susan should know and be able to accomplish by the completion of the assignment. This plan should be reasonable in terms of time and scope. Finally, establish performance evaluations for Jane to review with Susan, suggests Persad.

"The above approach increases the likelihood that Jane's fears will be alleviated and replaced with a sense of importance, value and trust," points out Persad. "Moreover, Susan will learn to respect and trust Jane and continue to see Jane as a mentor."

Bonus tip: Periodically evaluate your plan's execution to assure consistent progress. Establish measurable performance benchmarks.

Comments or thoughts on this article? Please e-mail [email protected].

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