Family businesses are doomed to die

Family-owned businesses don’t do a good job building future leaders. When evaluating potential employees, owners of FOBs consider cultural fit above most other factors.

Fitting in with the family is important — nobody wants to work with people they don’t like. But, choosing culture over competency will leave you with people you like (such as your family), but not necessarily people you can rely on to run all or part of your business.

FBOs hire family because family is a “cultural fit,” and not always because the hired family members are the best candidates for the job. It’s up to you to make the family member you hired the best candidate for the job.

According to the Family Business Institute, only 30 percent of FOBs last into a second generation, 12 percent remain viable into a third, and only 3 percent operate into the fourth generation and beyond. We’re going to talk broadly about why so many FOBs fail to continue their legacy, and in future columns, I will drill down deeper on specific issues.

Bad talent management?

A survey conducted by the Harvard Business School found that the directors of FOBs received lower performance ratings than non-FOBs, especially in the area of talent management. According to the report, “the results were striking: There was not one meaningful measure — from missing skill sets to the effectiveness of succession practices to creating more diverse boards and workplaces — on which FOB boards outperformed non-FOB boards.”

FOBs said they lacked Human Resources talent, succession planning, strategy, financial audits and compensation skills compared with non-FOBs. FOBs shared that their biggest threats were innovation (making their current product, service, or business model obsolete) competitive threats (losing market share to larger competitors) and rising costs of materials (due to a lack of sophistication, relative to non-FOBs in hedging and predicting costs).

Does this sound like you? Running a family business is hard. Making sure it survives the next generation is even more difficult.

But, you can increase the chances of success and prevent being a statistic by identifying and developing high-potential, C-level candidates and strengthening their skill sets, letting them make their own decisions, while monitoring their performance to hold them accountable. The best family firms don’t bequeath responsibility and power to family without also investing in their future leaders.

Define leadership roles

The right transitional support can be meaningful in helping Junior become a good leader.

Junior needs to be developed as a real candidate, and not just given the position out of some sort of familial tradition, or expectation. However, rarely is there a workshop with both the family and nonfamily advisers to design the succession process. There’s not even a developed plan or review system, with the input from the rest of management, for the first month or year of the family member’s promotion.

Instead, typically, everyone in the office knows who is going to take over and, one day, the baton is simply passed, often to the firstborn of the owner, even when that’s not necessarily what’s best for the company.

Whether Junior is taking over the CEO role, or some other high-level management position, leadership principles and roles must be clearly defined.

And you must have the right family members in the right positions. Perhaps your family has, for example, a perceived hierarchy based on age. That family practice shouldn’t extend to business.

Just because Junior is your firstborn doesn’t mean he should be the heir apparent to the CEO position. The only rule for hiring and promoting family should be based on each person’s merits, regardless of where they fit on the family tree.

Accountability

Without the proper training, Junior can let you and the company down. If members of your family aren’t performing to your expectations, it is important to have an open discussion with them about accountability and learn how the underperformer sees their role in the business.

You’ll have to respond, gently, with an unambiguous description of your expectations of them. And put it in writing, even if it’s an email, because it’s easier to refer to those expectations later (especially if they haven’t lived up to them).

If they don’t agree with your expectations, don’t automatically assume they are being combative. They could simply be placed in the wrong position. They can be offered other opportunities, where they have a better chance at succeeding. This allows you to move an underperforming family member while still allowing them some dignity.

Although, you should realize that your underperforming family member may want out. They may view your business as a source of wealth, an inheritance to receive, and not as a family legacy to endure. If that’s the case, or if you can’t place them in a position where they live up to their own agreed-upon expectations, you’ll have to consider letting them go.

It harms the culture of your company to keep underperformers around, as it builds resentment from all your employees, both family and nonfamily.

Conflict resolution

Lastly, it’s easy to say, but it’s hard to do — keep the family in the family, and the business in the business, by establishing rules for conflict resolution.

A family fight can kill a project and crush employee morale when relatives try to resolve business problems with a familial attitude. Conflict in a business is good. Among other things, conflict can mean an open-minded discussion is occurring.

However, when relationships are personal, often the conflict becomes personal and, instead of collaborative conflict, the result is an emotionally charged, passive-aggressive exchange. It wouldn’t be acceptable if it were to nonfamily co-workers, nor is it acceptable if it’s family.

Most family businesses fail to survive into the second generation, but some thrive because they follow the advice of setting expectations, training the family members, placing them in roles where they can succeed, and maintaining open communication. Where will you end up?

Allen Harris, the author of “Build It, Sell It, Profit – Taking Care of Business Today to Get Top Dollar When You Retire,” is a certified business valuation specialist, certified value growth adviser and certified exit planning adviser for business owners. He is the owner Berkshire Money Management (BMM) in Dalton, managing investments of more than $500 million. Allen’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Allen at AHarris@BerkshireMM.com.

This article originally appeared in The Berkshire Eagle on February 14, 2020.