Whether it’s the preceding generation not wanting to let go, the succeeding generation being unwilling to acknowledge the need for outside leadership or any number of other potential problems in between, statistics show that the more generations a business stays within a family, the lesser its chances of staying successful.
So, what steps can family business owners take in order to give their company the best chances of staying strong for the long term? A panel of experts shared their thoughts during a January panel discussion at the Minneapolis Club hosted jointly by Upsize magazine and Rick Brimacomb’s Club Entrepreneur.
Communication is key
One regular theme among the entire expert panel was the need for better communication among participants in the family business.
Those that are successful meet regularly, whether quarterly, monthly or on some different schedule, to discuss various issues of importance, says Jon Keimig, director of the Family Business Center at the University of St. Thomas.
“There are different types of meeting where they get together, but it is not talking about the day to day of the business,” he says. “It’s talking about far off into the future and planning for the family and ownership of the business.”
It’s especially important for dealing with any lingering conflicts, which can be healthy to a point, but often go unresolved and become a hindrance, Keimig says.
“The problem is the family wants unity,” he says. “Those two things are tough.”
Kelly Thorp, president of Sarah Bridges Consulting, suggests using outside resources, whether it’s an advisory board, a coach or a consultant, who is trusted and objective.
“Have someone come in and mediate and coach and have the conversation together,” she says. “This does a couple things. One, it gets you to the other side, but also, two, it ensures that everybody is heard. Because we all have roles in our families outside of work that sometimes show up at work. We want to make sure that one, it’s conducted in a way where the best possible outcome occurs, and two, where everyone has a voice at the table.”
What does not work is ignoring the issues. “If there is a conflict it’s better to get it out in the open instead of bottling it up,” says Tammy Hutter, tax manager at Eide Bailly. “Everybody might get a little heated and you might have to have somebody in the room, a neutral party, which helps.”
One area where family businesses have traditionally struggled, both in communication and execution, is succession planning. In the past, says Doug Wolgamot, a shareholder at Winthrop & Weinstine, family business owners often waited until it was too late to take up the issue of what would happen when they wanted to move on.
“It’s really easy to kick the can with planning,” he says. “Nobody wants to talk about death and taxes. It’s really easy to push it off for another day. And that can really create problems.”
Even if they did make plans, they often put them in a drawer without informing their heirs.
“Then mom and dad would die and [the kids] would find out what the plan was,” he says. “It just didn’t work really well. Now there’s a shift toward family governance and family meetings and having those meetings early. I think that’s really the key to having a successful plan.”
That’s important, Thorp says, because business owners cannot assume their children or other relatives want to actually stay in the business.
“Sometimes we do have blinders on because it’s something we desire, we want for that person,” she says. “There are times when those blind spots can create pressure to join a family business where maybe that person is going to be better suited following a passion somewhere else.”
Add outsider help
While family business owners might be tempted to insulate themselves from the greater community around them, panelists say they should actually be more aggressive in seeking advice and assistance from the outside.
That can come in the form of a board of directors or board of advisers, says Thorp, who recommended at least a few such voices. They’ll be impartial but vested and they’ll tell you the truth.
“They’re going to care about your business,” she says. “Getting that outside perspective from a couple different people is really important.”
One note: It’s important as younger generations cycle into leadership that they bring on their own advisers.
“Sometimes you’ve got to cycle off advisers and bring new ones in,” Keimig says. “Often when there is that transition, mom and dad’s advisers are mom and dad’s age. So, how do you start integrating younger advisers that align more with the next generation?”
Or, in the case where none of the succeeding family members are ready to step into leadership roles, outsiders can help bridge the gap there until that next generation is prepared. That’s important, not just for having the right people in the right roles, but also for being able to grow and adjust as a company to new ways of doing business.
“A family member might not be the best person for that job. Even though you want to hire them, you have to be realistic,” Hutter says. “As families go down the next generation, there are going to be some members that are involved and some that aren’t. Along those lines, maybe what worked for mom and dad for 30 years isn’t going to work for the next 30 years, so they have to be open to making changes for the future.”
Adds David Lyman, principal at Lyman Executive Search: “As a family business you have to realize there is a market out there. You can’t get so insular about talent; in particular you’ve got to be an attractive employer.”
Family culture as selling point
Panelists universally agreed that hiring is one of the biggest challenges facing family-owned businesses today.
“Everyone is feeling that pressure,” Keimig says.
Lyman says family businesses and the cultures they bring with them can be an alluring selling point for bringing in leaders from larger corporations. One thing to keep an eye on, however, is the newcomer’s fit into the culture of the business.
“One thing I’ve learned is when an outside leader comes in, they soon discover it’s not all about profits, it’s about legacy, it’s about intangibles,” he says. “It surprises some people.”
Communicated well, he says, it can be a tremendous advantage for a family business. People outside a family business often times think it’s automatically going to be dysfunctional. That’s often not the case.
“I think the family dynamics are actually a real sell,” Lyman says. “They’re very attractive. For a large company person coming in, it’s less bureaucratic. It’s quicker decision making.”
But while the family dynamics can be a selling point, they can also be a challenge. You might have two or three different generations within the business under one roof, Thorp says. They’re different people driven by different motivators.
“Understanding the motivation, the thinking style, the drivers, even things as simple as the way different generations like to give feedback can help you be effective in your leadership of that family business,” she says. “Stay curious and informed on multi-generational implications.”
Transitions also bring challenges
That can be true, as long as the family dynamics don’t turn dysfunctional. Often, panelists say, parents transition ownership to their children but don’t then give them the rope to actually take over. They often haven’t saved enough for their retirements or figured out what they are going to do with their lives.
“They think their kids are going to have the money to buy them out or they need to have a salary for the next five years, even though they are only coming in on those Tuesday mornings to make those ill-advised phone calls,” Keimig says.
While a honed, family business culture can be a benefit, it can also lead to some blind spots. That may be true of non-family “sacred cow” employees who underperform at their jobs, but have tenure and relationships in their favor.
“A new leader comes in and that’s a surprise,” Lyman says.
At times, family businesses also deal with entitlement issues, such as next generation members who believe “my dad is the boss so I can do whatever I want,” Hutter says. “That doesn’t go over very well. So … boundaries are very important to have in place.”
One strategy for dealing with that might involve the elder generation requiring a certain amount of experience outside the family business before a next-generation employee is allowed in the fold. Keimig cited one company that requires a four-year degree, five years of outside experience and an invitation from an uncle to apply for an open position.
“It shows the thoughtfulness behind the family’s decision to be a business-first family business” he says. “They weren’t just going to give you a position because your last name was on your jersey.”
So, it is possible for family businesses to survive and thrive from one generation to the next. But the path is fraught with some challenges and perils not always seen by non-family businesses that take diligence to overcome.
“People don’t realize when they are coming into a family business that the next generation doesn’t automatically happen,” Hutter says. “The transitions to the next generation don’t automatically happen. It takes a lot of work and planning to make it successful.”