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FEATURE STORY

KEEPING YOUR SMALL BUSINESS ALL IN THE FAMILY

Family businesses account for an estimated 64% of the U.S. gross domestic product (GDP) (nearly $5+ trillion), 62% of the work force and 78% of new jobs each year. Yet, running a family business can be the single sharpest doubled-edge sword created by man. The many benefits and blessings of a family business are equaled by the potential for conflict, financial risk and succession planning found in the internal structure of this type of business. Avoiding the pitfalls and reaping the benefits can often be a mine field of maneuver, but when done right can flourish into a highly successful organization.

According to the Family Business Institute (FBI), in a recent survey of certified public accountants found that there are ten primary areas needing additional guidance when building a family business. These include: growth planning; organization design, operational effectiveness, leadership/management, compensation, communication, customer service, risk management/succession planning, management and ownership transition and global perspective

Let’s review several of the key areas and consider options that may make life as a small business owner a little easier.

Nature vs. nurture

Is it the nature of an entrepreneur to build a business and then expect it to flourish without adequate planning and vision? More than likely yes, says the FBI. Often times family owned businesses are so deeply entrenched in the daily operations of the business that it’s difficult for them to adequately plan for long-term growth and success. On average, businesses growing in size to 20 or more employees begin to implement a hierarchical structure and that’s when trouble begins to brew.

The hectic pace of running the business takes precedence over the longer term needs of the organization. The best possible remedy for this situation is to schedule time away from day-to-day operations, even off site if possible and really dive into all phases of growth planning. Meet at a minimum of once per year and you’ll keep the business on track and ready for the challenge when new opportunities arise.

Organization design

The stress of managing personnel and family issues both in and outside the business is the leading cause of family business failure. Overlook these complicated relationships and it’s easy to see how a business can collapse under the pressure. As a result, 30% of family businesses successfully survive to the second generation, only 12% in the third, and only about 3% remained family controlled in the fourth generation, according to Joseph Astrachan, Ph.D., and editor of the Family Business Review.

Take steps to review your business’ structure and ensure that those in positions of authority actually belong in their roles. It’s important to recognize the talent of non family employees and reward them with management level positions. The creative energy an outside candidate can bring to the company is significant and can make the difference between business success and failure. Also have the company’s stakeholders meet regularly and review the organizational development and actively plan for future growth. These meetings are crucial to adequately forecasting new direction and vision for the organization and will keep the team on task as the company grows.

Debt management

The nature of family-owned business is that ownership is highly concentrated among the family members making traditional business practices more difficult to implement and follow through. Often owners are pulling cash out of the business on an as needed basis and not thoroughly considering the financial consequences until it’s too late to correct. Owners should educate themselves on the differences between expenses, cash outlay, accruals, balance sheet changes, capital expenditures and other areas of the business’ finances. A solid rule of thumb should be that no family members should be paid with borrowed money and only paid after all expenses and obligations have been met. A salary should be established for each family member and a full set of documentation including federal, state and local withholdings must be reported just as it would for any non-family employee.

If you want to provide a family compensation, it should be provided for all family members of the business and can be delivered in a year-end lump sum. One Maine family owned business opted to have the family compensation deposited into a single account that was then managed and invested by the senior family partner. Motives for this type of family payment are usually for tax or estate planning purposes, so provide a strong warning that members should not utilize this type of payment to raise their current standard of living. In tougher financial times, they should also be warned not to become accustomed to the payments as they may be the first to go during budget cuts.

Long-term thinking

Does your family business have a working succession plan? So many of history’s family-owned businesses have their private sorrows turned into an ugly public fight over ownership and money. Be sure that all of the control and assets are accounted for and that transition plans are in place in the event of a catastrophic event. If the business is run by the parents, is there a plan to train and groom a successor? Is the organization actively training a successor and the next generation of leaders to carry on the business that you’ve worked so hard to build? Have a visible chain of command in place and don’t keep the succession plan a secret.

Boundaries are essential

Business is business and family should most definitely remain separate. One of the major complaints by non-familial workers is that there is a perceived glass ceiling because the family members will ultimately hold the positions of power and authority within the organization. Be sure not to promote family members without proper cause and experience and do provide opportunity for outside candidates to make their own mark on the company. An article from the University of Southern Maine ’s Institute for Family Business, states that “t he family business also offers something different to each family member: security, opportunity, power, legacy, freedom, and perhaps slavery.  Working together can solidify a family, but with festering attitudes, can also dissolve it.” Keep careful watch that you strike a balance and familial harmony in your business and all will be well.

Remember that business talk should remain at the office. When attending social or family functions, turn off your business mode and try to avoid conversations about work. It’s critical to the success of the family if private, personal time remain separate and untainted by a carry-over of work issues and concerns. It’s also difficult for non-family members or spouses not involved in the business to feel a part of the family if business is always encroaching in the conversation. Enjoy your family for who they are and not because they work with you!

Seek help

There are over 120 family business centers across the U.S. Located primarily at colleges and universities, these organizations can provide valuable insight, guidance and resources for family businesses to help them navigate the sometimes complicated waters of entrepreneurship. Books such as Ron Watkin’s Birthright, Murder, Power and Greed in the U-Haul Family Dynasty or Sweet and Low, a Family Story, by Rich Cohen can give owners a serious reality check about what can go very wrong when greed, jealousy and ambition consume the family business. Utilize resources available from local think tanks and experts and always maintain an open line of communication between family members. By learning valuable lessons from those that have gone before you and implementing steps to ensure that both your family and your business work in tandem, you’ll keep your family and business healthy and whole.

Think globally, act locally

Family businesses constitute nearly 80% of all business enterprises in the U.S.. On a local level they are the backbone of their communities, hiring a majority of employees in the cities and towns in which they operate and contribute to a majority of the area’s non profit and charitable organizations. Nationally, family-owned businesses sit on the shoulder and act as the conscience of big business helping to formulate policy on both economic and ethical fronts.

It’s important to never forget that your business holds a position of leadership in your community and your local economy. Be a responsible role model by participating in local government elections, becoming knowledgeable regarding key political decisions that affect your business and industry, and act with compassion and social consciousness toward your fellow community members. By carrying out your mission with enthusiasm and integrity, your brand will grow and set a positive example for larger corporations about what is really important in business ownership.

The philosophy of stewardship

True for all business but especially pertinent for family-owned business, the vision and philosophy of stewardship is mission critical. Given that only one in three family-owned businesses survive into the second generation, it is essential that every member of the company, family or not, have a solid understanding that it’s part of their role to leave the organization in equal or better shape than when they began working there. Unlike corporations whose main priority is dividends and profits, a family business must ensure that the company survives for future generations.

The next 10 years will see a further increase in the transition from one generation to the next as the baby boomers begin to retire in greater numbers and questions arise about who will take the reigns. Unlike 30 years ago, the sense of responsibility and loyalty to the family business has weakened leaving many business founders scratching their heads confused as to whom will carry on the business when they’re gone.

From business structures to managing debt, the financial advisors at Fiducial understand small business and can provide assistance to help your family business grow and be profitable. To speak with a Fiducial advisor call 866-FIDUCIAL or visit the web site at www.Fiducial.com.