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Preventive Maintenance for the Family-Owned Business

A family gathering may be the key to its survival

by Benjamin Benson

Let's consider "Bob Smith," who owns a successful pest control company and whose adult sons, Adam and Zachary, work with him in the business.

Bob loves both sons dearly, but knows full well that Adam is only using the family firm to avoid the real world, where he would have to compete on his own merits.  Zachary, on the other hand, started out working as a technician during high school, has earned the respect of the employees and customers and is making a solid contribution to the business.

Still, Bob is paying them equally and intends that they will inherit equally, running the business together after he is gone.  But the arrangement leaves him ambivalent.

On one hand, he wants to treat his sons equally because he doesn't want a fight at home.  On the other hand, he knows that -- in the context of Smith Pest Control Inc. -- they really aren't equal.  Adam doesn't get much respect around the firm and, if he wasn't his son, Bob would probably fire him.  Furthermore, Bob realizes that keeping Adam aboard isn't fair to the business, Zachary or, ultimately, to Adam.

Sound familiar?  More than 98 percent of the approximately 14 million businesses in the United States are privately owned, and the vast majority of these are owned by families.  These firms produce a major portion of our gross national product, provide most of our job growth and directly influence the lives of most Americans.

Yet, the mortality rate of such businesses indicates that building a lasting firm is no small project.  Fewer than 5 percent last long enough for a second generation to become involved.  A major reason, I believe is conflict between the needs of a business and those of family.

Of course, some families handle both very well.  Their firms provide successive generations with opportunities for work, financial security and status in the community.  Family members are personally enriched by sharing sacrifices and benefits.

Such families are able to balance their interests with those of the business.  they treat the business as a true family partnership, and each member is willing to make sacrifices.

They do have conflicts, of course, but resolve them in nondestructive ways. One method that works for many families is to write a family creed or, if you will, a constitution.

Such a document might, for example, state the conditions under which family members can enter the business, be compensated and own stock.  The specifics may vary widely, but the concept is appropriate for all family firms.  Ambiguity leads to turmoil.

Unfortunately, most owners and managers are so immersed in day-to-day pressures that they rarely take time to even talk about such issues, much less write a formal document. In some cases, they might wish to avoid such subjects as sibling rivalry, compensation inequities and stock ownership.  Those issues will not, however, go away.

The best way to deal with such issues is at a family meeting, preferably at a location away from the shop and the telephone.  (This is a good time to use that cabin in the woods.)

Participants should include all family members, whether active in the firm or not.  Invite in-laws as well, so they can learn directly what is going on, rather than second-hand.

Some families bring in a moderator or "facilitator" who runs the meeting.  This professional should be experienced in the issues of family-owned businesses and should keep the atmosphere non-confrontational.  He or she doesn't solve problems, but guides family members in doing so.

The right agenda is also important.  Families are very different in their solutions to problems, but these issues or questions seem to be universal:

1. Ultimate Objective: Why does this business exist?  will it be kept in the family, sold, merged with a larger company or go public?  Each requires a different strategy and places different demands on participants in the business.
2. Succession: Although no one lives forever, many company founders operate as if they'll be the first exception.  Successful transition to the next generation often depends on the ability of "Dad" or "Mom" to identify, train and -- apparently the most difficult part -- install a successor while he or she is still alive.
3. Estate Planning: Distributing stock equally on the founder's death may be "fair" to the heirs, but damaging to the long-term interests of the firm.  when writing a will, the founder should take a realistic look at his or her children and, perhaps, at their children and spouses.  Control should go to those who are active in the business.  Placate the others with Grandmother's heirlooms.
4. Family Creed: A creed is a written document which helps avoid the managerial tendency to make exceptions to rules which are only "understood."
5. Strategic Business Planning: Like most entrepreneurs, managers of family-owned businesses tend to favor a seat-of-the-pants operational style over a plan which sets goals and assigns responsibilities.  In addition, most relatives want to avoid employer-employee roles.  The result is an absence of both short- and long-term goals and strategies which makes many family-owned firms fall short of their business potential.
6. Reward System: When children are small, many parents actually measure food portions to avoid any appearance of favoritism.  When these kids later join the business, their parents continue this safe practice, paying each identical salaries.  Unfortunately, this does little to encourage high performance.
7. Performance Evaluation: Feuds sometimes erupt in family-owned firms over the charge that certain members aren't doing their share.  In reality, the problem may just be that jobs are poorly defined.  Both performance and morale will benefit from a plan which defines everyone's role and provides constructive feedback, not accusations.
8. Communication: Day-to-day business absorbs so much attention that the family seldom has time to discuss how well its long-range business plans are working.  Schedule such meetings once or twice a year to discuss both business strategy and how well the family creed (see No. 4) is working.
9. Who Can Play: Are all children free to join the business, or only those who have completed a specified course of education?  Some family businesses require children to work a couple of years elsewhere before entering the firm.
10. Outside Options: Relatives are often too close to their business and each other to look at problems objectively.  This is why many businesses have created independent boards of directors.  composed of local business people, these boards advise managers on sales strategy, organizational structure and company direction.  Overall, 10 to 20 percent of small businesses have such boards.

Several meetings may be necessary to produce an initial consensus, although these issues are never permanently resolved.  One important product of the first meeting should be agreement that other such meetings will be scheduled regularly.

This accomplished, families like those of "Bob Smith" should be able to face the future together, rather than as individuals who happen to be related.

Benjamin Benson has worked with family-owned businesses for more than 30 years.  He is director of family-business consulting services for Laventhol & Horwath, a national accounting and consulting firm.  He may be reached at...

Pest Management magazine / November-December 1988

Results?

Just in case you doubt the sort of impact an article such as this can produce, check this memo:

Subject: Paydirt

From: Benjamin Benson

To: Mark Dixon

Apparently, my article appeared in the Architect / Builders Journal.

This caught the attention of a woman in Detroit who owns a substantial wholesale plumbing supply company and it looks as though we will be doing a family retreat at a fee of about $5,000 with a good possibility of doing a business strategic planning at a fee of $12,000-$15,000.

Keep up the good work and spread the gospel as I expect this will become even more common.

                                                                               Ben

Mark E. Dixon