Challenges in Managing a Family Business
replaces Problems in Managing a Family-owned Business
The material in this publication may not
be reproduced or transmitted in any form or by any means
-- electronic, mechanical, photocopying, recording or other
-- without the prior written permission of the U.S. Small
Business Administration.
All of SBA's programs and services are
extended to the public on a nondiscriminatory basis.
TABLE OF CONTENTS
INTRODUCTION
KEEPING YOUR EYE ON THE GOAL
THE SPARKS FLY
IS THE MANAGER REALLY IN CONTROL?
WHO'S IN LINE TO TAKE OVER?
YOUR BROTHER-IN-LAW NEEDS A JOB
PERSONNEL PROBLEMS
SPENDING TO SAVE MONEY
MAINTAINING THE STATUS QUO BLOCKS GROWTH
HOW IS THE PIE DIVIDED?
WHERE DO YOU FIND MONEY?
INFORMATION EXCHANGE
CONCLUSION
APPENDIX: INFORMATION RESOURCES
INTRODUCTION
When you put up your own money and operate
your own business, you prize your independence.
It's MY business, you can tell yourself,
in good times and in bad.
In a family company, however, it's OUR
business.
When family members work together, emotions
may interfere with business decisions. Conflicts may
arise as relatives see the business from different perspectives.
Those who are silent partners, stockholders and
directors are likely to judge capital expenditures, growth
and other critical matters primarily by dollar
signs. Those engaged in daily operations are more likely to
be concerned about production and sales figures
and personnel matters. Obviously, there is potential for
conflict.
In some family companies, daily operations
are hampered by conflict; in others, the challenge is a
high turnover rate among nonfamily employees. Growth also
may be a dilemma if some relatives are reluctant
to plow profits back into the business. Conflict in the business
also can be aggravated by family members who
have little talent for money or business -- the offspring
of company founders who lack business acumen
or in-laws who must be employed without regard to
their ability or the company's needs.
The manager of a family-owned business
faces the same challenges as the owner-manager of any small
company. However, the job of family manager may be complicated
by relatives who must be reconciled to working
together in a business.
This publication discusses such challenges
from the viewpoint of the family member who is the company's
manager or who is involved in management. It offers suggestions
to help you manage effectively and profitably.
KEEPING YOUR EYE ON THE GOAL
Like any enterprise, it is essential that
a family business have
A clear mission, a statement of purpose
and goals.
! A clear chain of command
-- lines of authority -- for decision making.
! A clear plan to accomplish goals and
provide for orderly succession.
! Good communication among family members
and with nonfamily employees.
These factors are doubly important in
a family business because of the strong emotions that can
arise and the confusion that can occur in their
absence.
Rights and responsibilities are different
at home than at work, and it is imperative that family members
keep this fact in mind. At home family relationships and goals
are the prime concern.
Language is personal, attitudes are subjective,
roles -- husband/wife, parent/child, family/relatives/in-laws
-- are traditionally defined.
At work, however, the success of the business
must be paramount. Language becomes more impersonal,
attitudes more objective. Family members who work in the business
must accept the boss/employee relationship, as
they would in any other business. Their job descriptions must
be clear, in writing and adhered to. Problems
arising at home should be left there when the workday begins
and workplace problems should not encroach on home life. Family
members who accept and observe the home/business
dichotomies not only avoid strained personal relationships,
but also convey an important message to all employees
that in the workplace business goals come first.
This, of course, is the ideal situation.
THE SPARKS FLY
What happens when family behavior in the
workplace falls short of the ideal? Differing opinions do
not always produce discord in a family-owned company, but
they are more apt to cause sparks to fly. Emotion
is the added dimension as brothers and sisters, uncles and
aunts, nephews and nieces, and parents and children
work together.
The individual managing such a company
must recognize the emotional dimension and make the necessary
objective decisions to ensure smooth functioning. Among members
of a family who are active in a business, it
may be hard to be objective about one another's skills and
abilities. He was lazy when we were kids, and
he's still lazy. What does Aunt Bess know about the business?
She's only here because of her father's
money.
If emotional outbursts affected only the
family, the manager might knock a few heads together and
move along. But quarrels and ill feelings among relatives
affect nonfamily employees as well.
The manager's challenge is to keep the
bickering from interfering with work. In an emotional atmosphere
nonfamily employees may be tempted to base their decisions
on family tensions --- they know how their bosses
react and are influenced by this knowledge. But the company
cannot become a warring camp. All employees must
understand that their interests are best served by a profitable
organization, not by allegiance to particular family members.
The leader of the family business must
not take sides with any member of the family, but rather must
demonstrate that disagreements will not be permitted to affect
the business. This attitude discourages nonfamily
employees from politicking for position. When the family leader
demonstrates respect for the family and an understanding
of the differences, nonfamily employees are not
tempted to play politics.
IS THE MANAGER REALLY IN CONTROL?
! The president of a small family-owned
company is not necessarily the person in charge.
The family elder statesman may be president or chairman
of the board of directors, but day-to-day management
may be in the hands of other family members.
! The ceiling may be too low on the
amount of money that can be spent without permission
from too many members. Unrealistic or unnecessary clearance
procedures may result in missed opportunities
for increased profits, such as failing to take
advantage of a good price on raw materials or sales inventory.
! Personalities and emotional reactions
work against efficient operation. For example,
even routine matters must be authorized by top family members
because Uncle Bill never lets you forget your
mistakes.
! Efficiency may be reduced by relatives'
engaging in excessive family talk during working
hours. The manager must set an example and insist relatives
refrain from chit-chat on the job.
! Managers may owe their positions to
their age or to the amount of capital they have
invested and may lack leadership ability.
! Some family managers may hinder progress
because they do not know how to listen.
Family members in charge of operations
must be
! Capable of using efficient management
techniques.
! Thick-skinned enough to live with
family bickering.
! Tough enough to make decisions stick.
Definite lines of authority are essential
when a member of the family manages operations and other
relatives fill various jobs. Family employees must discipline
themselves to work within the lines of authority
and the responsibilities of family members should be spelled
out. Even then, it is wise to have a nonfamily
employee highly involved in operations, to help resolve problems.
One solution to management problems is
to let someone else -- a hired manager -- run the day- to-day
show. The family member retains a title and some authority,
but the hired assistant acts as a buffer between
the family and the organization. The assistant might be executive
vice president or chief operating officer and
the family member, president or chief executive officer.
With a hired manager, the family leaders
are free to work on future strategy, basic policy and growth,
while the nonfamily employee guides day-to-day operations.
The authority of the manager, whether
family or nonfamily, to suspend or discharge flagrant violators
of company rules must be clear. Management control is weakened
if family employees are exempt from rules.
WHO'S IN LINE TO TAKE OVER?
An important issue that requires early
planning is Who will take over when the family member managing
the business dies or retires? Planning is especially critical
when the top family member approaches retirement
age or is in poor health, but the best time to prepare for
orderly succession is before transition looms.
A family meeting in a neutral setting away from interruptions
can help focus discussion, perhaps with the assistance of
a professional consultant to guide the agenda.
Consideration on the agenda should be
given to
! Family goals for the future.
! Plans of next-generation family members.
-- Who is interested in staying with
the business?
-- Who has the most aptitude for leadership?
-- What if several able younger family
members aspire to lead the business?
-- What role will other younger members
play?
-- What if next-generation family
members are not interested in the business?
! Grooming of future leaders.
! The most likely times major transitions
will occur, barring unexpected illness or death.
! Preparations of present leaders for
stepping down.
! Financial aspects of leadership transitions.
The importance of preparing for succession
before a new leader must take over cannot be emphasized
too strongly.
YOUR BROTHER-IN-LAW NEEDS A JOB
A common challenge in a family enterprise
is that of relatives who lack an aptitude for the business,
or any apparent usable talent or skill, but also who must
be hired. The emotional pressure is hard to resist
when your sister says, Bob needs a job, badly!
Accept the challenge with your eyes open,
because it will be hard to fire Bob, even if his employment
costs the company more than it earns. Moreover, he could demoralize
other employees if he loafs on the job, avoids
unpleasant tasks, takes special privileges or otherwise exhibits
a poor attitude.
Training Bob may require extra effort,
but few people are totally unskilled.
! Endeavor to cultivate a talent he
possesses that will contribute to the business.
! Provide special training.
! Assign him to special projects to
reduce negative contact with other employees and
to provide an opportunity for developing skills.
! Arrange for him to work under a nonfamily
supervisor who is a top producer.
The key is to transform the untalented,
minimally skilled relative into a productive employee, as
quickly as possible.
PERSONNEL PROBLEMS
A common challenge to family-owned companies
is high turnover among top nonfamily employees.
Some relatives resent outside talent and can make things unpleasant
for nonfamily executives. Also, top-notch managers
and workers may leave if most promotions go to family members.
Exit interviews are useful to find the cause of high turnover.
A departing key employee may tell you enough
to help you develop a positive course of action.
Again, it is wise to counsel nonfamily
employees to not take sides in family disputes. Outside employees
who demonstrate fairness and compatibility become a stabilizing
force in the company. The family needs these
people and should assure them of a future with the firm.
Confronting a trouble-causing relative
is difficult at best, and firing one may be out of the question.
Consider these alternatives:
! Counsel the family member on the responsibility
to set an example.
! Encourage the relative to start a
business in a noncompeting line, if he or she has the
management ability necessary for success.
! Transfer the relative to a branch
office.
! Find him or her a job with another
company.
In short, if you are unable to fire troublemakers,
try to change their attitudes or change their jobs.
SPENDING TO SAVE MONEY
Many times, as owner-manager, you know
a specific investment will improve efficiency or profits,
but other family members may see the move as just another
expense. They view such expenditures as encroachments
on year-end dividends. It is important that these relatives
understand the concept of spending money to make
money.
! Base your arguments on facts and figures
gathered by nonfamily employees.
! Suggest that the matter be settled
on a bottom-line basis by demonstrating how Spending
"$x for this machine will increase our profits by $y
annually and will return our money in four
years."
Should opposing relatives
reject your projection, enlist the help of outside advisers.
Relatives may be more likely to believe a banker,
accountant or attorney than to accept your judgment.
Keep in mind that it is unwise to have outside advisers
who are personally close to other family members.
In other situations, paid consultants
can help prove the worth of an opportunity. Such help is particularly
valuable with projects requiring specific expertise or intensive
research.
MAINTAINING THE STATUS QUO BLOCKS GROWTH
As relatives in a family-owned business
grow older, they may develop a preference for maintaining
the status quo. They become wary of change and afraid of risk.
This attitude can, and often does, block business
growth.
The solution: Encourage status quo members
to gradually retire from the scene of operations.
! Dilute their influence in management
decisions. For example, give them an opportunity
to convert their investment in the corporation to preferred
stock.
! Engage estate planners who may suggest
tax incentives for giving or selling some of
their stock to younger relatives.
! Encourage them to take a larger role
in community activities or in an industry association.
! Encourage their involvement in other
directions, such as pursuit of personal hobbies
and interests.
! Explore the possibility of restructuring
the business, with a new partnership agreement,
for example. (Proper legal advice is essential in restructuring.)
Such actions recognize the contributions
of retreating members and assist them in recovering their
equity. At the same time, the manager and active relatives
can plan for the future.
HOW IS THE PIE DIVIDED?
Paying family members and dividing profits
among them can be a challenge.
Many people feel they are underpaid, but
the complaints may be more specific and more personal
in the family-owned business. Uncle Jack just sits around
and he makes more than I do.
Aunt Sue goes to Europe on the returns
of money her husband put into the business before he died
ten years ago. Your brother goofs off and makes more than
you do. How do you resolve these complaints?
You can't entirely, but you can be as fair as possible.
! Equity that recognizes contributions
can be distributed by restructuring the company.
! Salaries are best handled by matching
them to industry guidelines. Determine local
salary ranges for various jobs and use these as a guide
for paying both family and nonfamily personnel.
When you tie pay to a job description you recognize
the value the industry puts on jobs and you treat all employees
fairly.
! Fringe benefits can also be useful
in establishing equity among family members. Deferred
profit-sharing plans, pension plans, insurance programs
and stock purchase programs offer excellent
means to placate family members and, at the same
time, help them build personal assets.
How the profit pie is divided is vital
to growth in a small business. Profits are the seedbed for
expansion, and lenders are influenced by what
is done with them. Relatives should know the consequences
to the business if all profits are converted into dividends.
WHERE DO YOU FIND MONEY?
Another major challenge in managing a
family business is obtaining money for growth.
Generally speaking, if the company is
profitable, you can borrow from your local lender, but when
growth is substantial, the company may outgrow its local bank.
When you see prospects for expansion, you should
begin to plan for it and consider techniques for financing.
Planned financing may be a combination of
! Taking or refinancing a mortgage using
the company's assets as collateral.
! Asking suppliers to extend credit
on purchases.
! Factoring (selling) the company's
receivables.
! Inventory financing.
! Borrowing from friends on a personal
note basis.
! Borrowing the cash surrender value
of life insurance policies owned by relatives.
! Obtaining a long-term loan from an
insurance company.
! Working with a lender and the U.S.
Small Business Administration (SBA) to get a business
loan.
! Financing with a Small Business Investment
Company licensed by SBA.
If the business is a small corporation,
the following techniques also offer possible sources of money:
! Selling a portion of the stock for
cash to the company's employees.
! Selling some of the stock for cash
to another company. In a merger, you can use the
credit of the larger company.
! Contacting a regional investment banker
who may privately find a lender, using some
of the company's stock as collateral.
! Contacting a national investment banker
who will underwrite some of the company's stock.
This is called going public.
Effective budgetary controls are important
in seeking growth funds. Such controls help the managing
relative determine the company's needs, and lenders regard
them as evidence of good management.
INFORMATION EXCHANGE
In most communities, the manager of a
family-owned business is not alone. Other individuals operate
small companies for their families and provide a source of
information, support and help.
Family business managers should seek out
and cultivate relationships with their counterparts to exchange
ideas with them and to learn how they've solved business problems
with their own relatives.
In a small corporation, strategic thinking
can be stimulated by including outsiders on the board of
directors, people who are not relatives and who are from other
types of businesses.
State and national trade associations
also are good sources of information and help. Through them,
the managing relative can get facts from noncompetitors.
CONCLUSION
There are no simple or quick solutions
to the unique challenges faced by family businesses. But the
first thing to do is recognize a problem or one that may develop.
Here are some simple suggestions:
! Don't let the same lawyer handle all
family members' affairs. Hire different attorneys
to get new ideas and to ensure fairness in cases of disagreements
among family members.
! Try to have all business agreements
in writing:
-- buying and selling of shares, etc.
-- salaries and retirement age
-- dividend policies
-- limitations on sale of stock
-- lines of authority
-- liability of stockholders or partners
-- job descriptions
! When a parent transfers stock to a
child, be certain there is a proxy arrangement. Establish
a contingency plan for the stock in the event of the child's
death.
! Conduct regular meetings with family
members to talk about plans, programs, strategies
and problems. Hold the meetings away from work yet in a
business atmosphere.
! Do not discuss business at family
social gatherings or at home.
! Use outside advisers who have no connection
with or relationship to any family member.
! Take advantage of family loyalty and
affection. Use it to your benefit. Enjoy your business
and work together for everyone's well-being and financial
success.
! Encourage family members to read this
publication so they can understand some of
the challenges arising in family business.
APPENDIX: INFORMATION RESOURCES
U.S. Small Business Administration
(SBA)
The SBA offers an extensive selection
of information on most business management topics, from how
to start a business to exporting your products.
SBA has offices throughout the country.
Consult the U.S. Government section in your telephone directory
for the office nearest you. SBA offers a number of programs
and services, including training and educational
programs, counseling services, financial programs and contract
assistance. Ask about
• SCORE: Counselors to America’s
Small Business, a national organization sponsored by
SBA of over 11,000 volunteer business executives
who provide free counseling, workshops and
seminars to prospective and existing small business people.
Free online counseling and training at www.score.org.
• Small Business Development Centers
(SBDCs), sponsored by the SBA in partnership with
state governments, the educational community and the private
sector. They provide assistance, counseling
and training to prospective and existing business people.
• Women’s Business Centers (WBCs),
sponsored by the SBA in partnership with local non-government
organizations across the nation. Centers are geared specifically
to provide training for women in finance, management,
marketing, procurement and the Internet.
For more information about SBA business
development programs and services call the SBA
Small Business Answer Desk at 1-800-U-ASK-SBA
(827-5722) or visit our website, www.sba.gov.
Other U.S. Government Resources
Many publications on business management
and other related topics are available from the Government
Printing Office (GPO). GPO bookstores are located in 24 major
cities and are listed in the Yellow Pages under
the bookstore heading. Find a “Catalog of Government Publications
at http://catalog.gpo.gov/F
Many federal agencies offer Websites and
publications of interest to small businesses. There is a nominal
fee for some, but most are free. Below is a selected list
of government agencies that provide publications
and other services targeted to small businesses. To get their
publications, contact the regional offices listed
in the telephone directory or write to the addresses
below:
Federal Citizen Information Center
(FCIC)
http://www.pueblo.gsa.gov
1-800-333-4636
The CIO offers a consumer information catalog of federal
publications.
Consumer Product Safety Commission
(CPSC)
Publications Request
Washington, DC 20207
http://www.cpsc.gov/cpscpub/pubs/pub_idx.html
The CPSC offers guidelines for product safety requirements.
U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
http://www.usda.gov
The USDA offers publications on selling to the USDA.
Publications and programs on entrepreneurship are also available
through county extension offices nationwide.
U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Washington, DC 20230
http://www.osec.doc.gov/obl/
DOC's Business Liaison Center provides listings of business
opportunities available in the federal government.
This service also will refer businesses to different programs
and services in the DOC and other federal agencies.
U.S. Department of Health and Human
Services (HHS)
Substance Abuse and Mental Health Services
Administration
1 Choke Cherry Road
Rockville, MD 20857
http://www.workplace.samhsa.gov
Helpline: 1-800-workplace. Provides information on Employee
Assistance Programs Drug, Alcohol and other Substance
Abuse.
U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with labor
laws.
U.S. Department of Treasury
Internal Revenue Service (IRS)
1500 Pennsylvania Avenue NW
Washington DC 20230
http://www.irs.gov/business/index.html
The IRS offers information on tax requirements for small
businesses.
U.S. Environmental Protection Agency
(EPA)
Small Business Ombudsman1200
Pennsylvania Avenue NW
Washington, DC 20480
http://epa.gov/sbo
Hotline: 1-800-368-5888
The EPA offers more than 100 publications designed
to help small businesses understand how they
can comply with EPA regulations.
U.S. Food and Drug Administration (FDA)
5600 Fishers Lane
Rockville MD 20857-0001
http://www.fda.gov
Hotline: 1-888-463-6332
The FDA offers information on packaging and labeling
requirements for food and food-related products.
For More Information
A librarian can help you locate the specific
information you need in reference books. Most libraries
have a variety of directories, indexes and encyclopedias that
cover many business topics. They also have other
resources, such as
• Trade association
information
Ask the librarian to show you a directory
of trade associations. Associations provide a valuable
network of resources to their members through publications
and services such as newsletters, conferences
and seminars.
• Books
Many guidebooks, textbooks and manuals
on small business are published annually. To find
the names of books not in your local library check Books
In Print, a directory of books currently available
from publishers.
• Magazine and newspaper articles
Business and professional magazines
provide information that is more current than that found
in books and textbooks. There are a number of indexes to
help you find specific articles in periodicals.
• Internet Search Engines
In addition to books and magazines, many
libraries offer free workshops, free access to computers
and the Internet, lend skill-building tapes and have catalogues
and brochures describing continuing education
opportunities.
