The most common circumstance that creates a Family Business is a founder who, over time, brings family members into the business. This might be Dad who asks Mom to help grow the business. It might be children who have joined the business. Sometimes just because they needed a job. Sometimes they have a desire to be in that business, sometimes there is an intent to transfer to business to the next generation.
This happens in businesses of all sizes. It might be a $1 Million or $3 Million revenue business with a few, a dozen employees. It might be a $50 Million revenue company with hundreds of employees. I have worked in a business that was a publicly traded corporation (although the families still owned over 40% of the equity). Two founders, related by marriage, were the top two executives, even though both were more than eighty years old. Senior management included second-generation folks, and other related people were employed at other levels. There was substantial outside professional management. No company that large could be run effectively without a lot of technical expertise. But the original founder still personally signed every check issued by the business!
The issues in Family Businesses come about because of the differences between individuals such as personalities, character, aptitudes, experiences (paradigms), etc. Every business with two or more people employed has these conditions which affect relationships among employees. The difference in Family Businesses is the personal relationships. The family dynamics: the relationships that have developed over twenty-plus years as parent and child, or as spouses, or sometimes just two unrelated people who have been partners for years. And, not only do we have these personal relationships impacting how we work together, there is usually a tacit understanding by everyone who deals with such a business, the employees, customers and vendors alike, that these people have a special relationship, are more valuable to each other than any non-family employee. This includes an assumption that family members are more entitled to their jobs and would be the last to be “asked to leave” their employment. One big issue for non-family people in a management team is that management issues and decisions are not always discussed only in the office. Even topics that were “decided” in a staff meeting sometimes are modified, revised or even reversed as a result of discussions over Sunday dinner, which include the family members but NOT the non-family managers.
A bigger issue for many Family Businesses is the amount of control exercised by the founder, especially if s/he is a Type A, autocratic manager rather than a collaborative leader. All businesses go through a life cycle, of several stages, influenced by the natural circumstances which occur to businesses. However, external forces can significantly impact the timing of certain phases, hastening the decline and death stages if the business does not react promptly to outside forces. The concept called “Creative Destruction” occurs frequently in our world. New ideas, inventions or just better mousetraps have a big impact. Think about cassette tapes and vinyl records: nowadays, you stream music, not own it. New and better creations have destroyed the old. The challenge for any business, but even more so in family businesses, is the desire to continue “we’ve always done it that way”, and ignore the new because we don’t understand the new technology, or because we fear that the new is so radical that we will not be able to compete. This gets to be very disrupting if it is your adult children telling you that the world is changing and that you need to adapt. They may or may not be right, but you should listen. Not listening to input from others is closing the door on opportunities and threats, and either could cause the death of your business if ignored.
Don’t be afraid of change. It is scary, but it is necessary. Think of Ford, changing from steel to aluminum for the bodies of the best-selling truck for almost forty years? Can you afford to risk your best-selling brand? Can you survive if you don’t take a risk to be better?
There can be a lack of effective “dual control” (independent oversight of transactions) if the parties are related. Ask your CPA advisor about how to ensure adequate controls in a small business. You need to know that an employee is stealing before the amounts become large. It is amazing to me how many employees have stolen a million dollars from their employers. This obviously takes years, and lack of attention.
Every business owner has the right to set policies regarding “personal” expenses paid by a business. Almost every one-owner business I have ever seen has provided a nice vehicle for the owner, always at company expense. I can frequently pick out the owner’s car in the parking lot: the Cadillac Escalade or the Suburban/Yukon is almost always the owner’s vehicle. However, abuse of these decisions can generate significant problems. Tax auditors can reclassify personal expenses as dividends for example, effectively negating any tax deduction, and taxing that amount twice. If you give your spouse a business credit card for buying groceries, not only will the taxing authorities object, but your banker may be concerned as well. First, anyone who cheats on his / her income tax may try to cheat their banker. Not good for a strong relationship with your banker. And extra expenses in a company dilute the company’s financial performance, degrading your creditworthiness, perhaps enough to negatively influence the banker’s credit decision. And, such practices will negatively impact the price when you are ready to sell the business. Also, if you cheat on your taxes and mislead your banker, what message does that send to your employees? Perhaps they will think: "Cheating is OK" Do you want to foster that attitude?
These family relationships impact everything that is done by people who work with such a business. Who has real authority? Who can make decisions (that will not be over-ruled by another person)? What is my career path here? Will there ever be a real opportunity to be promoted, take on responsibility, learn and grow, or will the son/daughter always get the best job?
What about compensation? Are family members paid appropriately? See my article about how to determine compensation for family members.
A Family Business Owner (or the Family as a whole) must address the issues that are different from those of a non-family business. This is just one additional task that must be managed to ensure the success of the business. Especially if this is a Family Business, think long-term: consider the impact on your grandchildren, as in, will this business still be here, and still be prosperous? Will it be able to grow to the point that it can support not just one family, but the families of Four, Eight or Twelve grandchildren?
One last thought: I wish for you that you will pay enormous amounts of income taxes over the years. I encourage you to minimize your tax liabilities of course, but income taxes only take a fraction of your total income. You will only pay large taxes if you have large income, so Go Big!