Planning can pre-empt family-related business conflicts

Take steps to define family members’ roles in your family business.

By Bonnie Kreitler

Family ties complicate everyday business decisions. If you want to pre-empt family-related business conflicts, experts advise setting clear policies as soon as the first family member joins the business — even if it’s just for a summer job. Without clearly outlined plans for family involvement, "Expectations develop over time that are unrealistic or inappropriate," says Randy Bliss, of YHB Consulting in West Hartford.

Bliss and other consultants note that family-business problems tend to cluster around two main themes: participation and succession. In both areas, you can anticipate problems and take steps to prevent them.

Clearly define relatives’ roles

Defining family members’ respective roles is one of the most important things you can do in a family business, says Bob DeLisa, of the DeLisa Consulting Group in Old Saybrook, which helps small to midsize companies with organizational development. One way to do this is by having job descriptions for everyone in the business — family members and nonfamily alike — so everyone understands what’s expected of them. This not only helps head off sibling rivalries, but also criticism from nonfamily employees about favoritism.

Besides defining roles, you need to lay out ground rules for participation of relatives in the business. Family businesses often operate with different rules for family members than for outsiders. Different employment or performance standards may even be applied to different family members. Or it may not be clear to nonfamily employees how they can grow with and participate meaningfully in the company. Any of those things can set you up for problems, say the experts.

To anticipate and resolve family-participation problems, Bliss advises that you answer some potentially thorny questions: Is every family member who wants a job entitled to work in the business? If so, at what age and in what capacity? Should a job opening exist before a family member comes on board or should a job be created for that person? Should family members be subject to the same qualification requirements and application process as outsiders? Should family members get outside business experience before joining the family enterprise?

When participation criteria and policies are the same for all family members, Bliss says, unrealistic expectations and hard feelings can be minimized.

Participation rules continue to be important after family members are on board, Bliss continues. Here are some of the issues you need to consider:

• Compensation. How will family members be compensated relative to fair market values and their contributions to the business, and relative to one another and to nonfamily employees?

• Evaluating job performance. Are family members subject to the same performance-review procedures as other employees? Who evaluates the performance of family members?

• Discipline. Can a family member be fired for infraction of company rules?

• Advancement. Are certain positions reserved for certain family members?

Finding and keeping key nonfamily members also eventually becomes critical to growing family businesses, says DeLisa. Clearly describing how these employees can participate in the family company and gain authority is essential to keeping them on board.

DeLisa leads his clients through a process of "expectations planning" to clarify participation issues. The starting point, he says, is defining exactly why your company is in business. Is your primary goal to make money? To provide jobs for anyone in the family who wants to work in the company? To grow the company to a certain level, then sell it? Understanding why you are in business can drive many other decisions.

Decide how to pass on both ownership and leadership

Experts agree that succession planning is the No. 1 issue most family businesses struggle with. Paul Sessions, director of the Center for Family Business at the University of New Haven, says it’s critical to define how succession will occur if a family business is to survive from generation to generation. Only three out of 10 family businesses make it from the first to the second generation, he notes. Only one of those three will make it to the third generation.

Succession actually occurs at two levels, says Bliss. Both business ownership and business leadership must be transferred. You need to have clear, separate policies for both transitions.

Think through the long-term impact of financial-ownership decisions. For example, parents may give an equal share of company stock to children working in the business and those not working in it. Before long, those working in the business may view their uninvolved siblings as parasites. Those siblings, in turn, may see their brothers or sisters as plunderers enjoying corporate perks at their expense.

Other financial-ownership questions you need to resolve include —

• What happens to children’s equity in the company if a stockholding child dies, wants to sell his or her share of the business, or gets divorced?

• Will the business literally be estate-taxed to death if you die?

• Can the business survive the death of a key partner whose stockholding heirs want to get out?

• How do you get your personal equity out of the business for retirement or other purposes without making it impossible for your children to earn a living through the business?

Figuring out how and when to leave the company and turn over authority is an emotional, as well as financial, issue. Hard-driving entrepreneurs often develop their children as followers, rather than leaders, Sessions says. When the time comes, no one in the family has been trained to run the company.

Besides planning a strategy to ensure that doesn’t happen, you need to consider these other leadership issues:

• Should every child have an equal decision-making share in the business, whether they work in it or not?

• Is the oldest child automatically heir to company leadership? Another child? Or will leadership be divided among siblings?

• Is there a timetable for passing leadership from one generation to the next?

Get neutral help

When family ties get mingled with business decisions, emotions can cloud good judgment. DeLisa emphasizes the value of a neutral third party to facilitate family-business discussions. "It’s next to impossible for family members to look at each other objectively," he says. Either they’re overly critical of one another, imposing impossible expectations, or they’re overly indulgent and paternalistic, not expecting the same of family members as they would of outsiders.

To work out family-business issues, Sessions advises bringing everyone together as a group, so everyone’s expectations can be discussed openly.

Whether you get outside guidance or keep your discussions within the family, planning is the key, adds DeLisa. "A goal without a plan is just a wish."

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