Entrepreneur, Business 29/06/2020
Family Business Matters: Navigating the Pitfalls
Regarding family business matters, with infighting and a destabilised work-life balance, is it any wonder so many fail to make it to the second generation?
Be in no doubt, a family business is the family’s business. When it comes to family business matters, many struggle.
I am sure you will have come across the statistic, quoted in the Harvard Business Review, and other publications, that 70 per cent of family-owned businesses fail to make it to the second generation. Marry that with the statistics that inform us 1 in 5 businesses fail in their first year and nearly half within five years, and one can clearly conclude that a family business has to find unique ways to survive.
As an entrepreneur, your chosen commerce is to sell yourself and your idea to the market. Ordinarily, your family would not be overly concerned or perhaps even interested in your risk-taking achievement, but for the results.
However, in a family-run business, even those who are not necessarily bestowed with a particular role, feel responsible for its success and want their voice to be heard. The business becomes a member of the family in every true sense of the word. It is the parent who cares for you and you for them, it is the child you want to nurture and see grow, but it can also be that unstable intoxicated aunt or uncle at..you name the relevant gathering … lurching from one disaster to the next, before being swiftly escorted from the event far earlier than anyone else.
Sadly I see many a family business fall into ruin or split beyond recognition due to the inability of the members to identify, coordinate and maintain a clear division between what is family and what are business decisions.
It’s right that the obvious reason for the business’s demise or failings may be due to a particular commercial decision that was taken. However, most of the time that poor decision arose due to the decision-maker being unduly influenced by either a family member, or an issue arising out of family relations.
I represented a wife who had discovered that her husband was taking cocaine and that his use was becoming more than just ‘recreational’. The business structure was a partnership but the partnership agreement, was basic and provided for a 51 per pent share to him, even though the wife considered it to very much be a joint venture in equal shares.
What the wife also hadn’t contended with is what was going to happen now she sought to resile from the agreement and, most importantly, how long and costly it was going to take before a resolution was achieved. In the meantime, the husband’s addiction grew worse.
This is one example of what happens when little care is taken regarding how a family business is formed and structured, but I have seen just as much damage caused by the ownership structure being so intricate and complicated that half the members don’t even understand it. There is nothing quite like sitting with a client asking them to explain their business structure and them struggling to do so.
It’s true, by the time cases get to me, they very much fall into the ‘worst-case scenario’ bracket, so what can you do to avoid those common family business pitfalls. Of course, every family is unique, as is their business, but common themes can be applied and adapted to suit.
Every business, no matter how small, should have a clear ethos or philosophy explaining the who, where, what and why of its inception, growth and longevity. The philosophy should be constantly referenced and refreshed by testing it against the business’s short and long term objectives. Without this regular exercise, it’s going to be impossible to shape the business or be clear about the path to successful and sustainable growth.
Family businesses are notorious for failing to identify clear lines of communication and structure. This can often lead to either “the buck stops with me” approach of many senior family members who don’t permit any decision being taken without their say so. Alternatively, you can have a situation where there is a scattergun approach to decision making, which results in a disconnected and disjointed approach to business, clearly damaging and unsustainable in the long run.
A simple and clear business structure, that is easily identifiable, but at the same time flexible enough to recognise when change is required, is a must to ensuring that the business’s ethos is able to reach every department unfettered.
Whether you’re running your business out of your garage, a shed in the garden, your attic, or a warehouse on par with an Amazon delivery centre, be protective of that space as being one of business, as opposed to an extension of the dinner table or the armchair.
Be strict about defining where meetings are to take place, decisions to be made and how they are to be minuted. Don’t fall into the trap of having casual conversations about business deals over the breakfast table, particularly where not everyone relevant to the business is welcome at that breakfast table.
Ensure you make plans for the what if, and I don’t mean the specifics, so that you tie yourself up attempting to define incalculable future events. I mean focused headlines such as “The Management of Disputes” or “Decision Making and Ill health”. In preparing these policies be prepared to have difficult conversations with those who may take personal umbrage and please ensure that they become lawfully ratified into the business’s memorandum or rules of operation.
Family-owned businesses are the driving economy of most countries (88 per cent in the United Kingdom and 90 per cent in North America), but acknowledging that family ties can undermine them is a threat you should not ignore. Different things matter when it comes to family business matters.