Family businesses are the backbone of the U.S. economy. In fact, studies have shown family-owned enterprises are responsible for more than half the nation’s employment.

It’s also undeniable that family businesses have a unique ability to leverage interpersonal relationships and loyalty in ways other businesses typically can’t.

On the flip side, however, family-owned companies often experience challenges found only in a familial environment.

Succession Planning

Failure to develop a succession plan is a common blind spot for family-owned businesses.

In 2017, over 40% of family business owners expected to retire in the next five years, yet most did not have a succession plan.

Family businesses tend to put off succession planning for a variety of reasons, including:

  • A perceived lack of time and resources
  • Belief that minimal planning is needed because the company will be passed down to a family member
  • Faith that someone will naturally step forward and take the reins
  • The perception that the current leader is the only one who can keep the ship afloat
  • Belief the company will be sold to a third party, making a succession plan unnecessary

No matter the reason, lack of succession planning can and does cause many family businesses to collapse.

Although succession planning is critically important, it can also be fraught with difficulties.

As we all know, every family—just like every business—operates with some degree of dysfunction.

Choosing a successor in a family business often causes the owner/parent to worry they are signaling that the new leader is their favorite child, which can be a problem at home and lead to a ripple effect at work.

Ultimately, the child who’s not chosen may become disgruntled and behave in unproductive ways that compromise the company’s performance and hurt family relations.

Non-Family Member Retention

In a family enterprise, non-family employees may believe opportunities to advance to the upper echelons of the company are limited.

Feeling like an outsider with little chance of professional growth can lead to a decline in motivation, engagement, and performance.
Feeling like an outsider with little chance of professional growth can lead to a decline in motivation, engagement, and performance.

It can also make retaining non-family talent difficult.

As non-family members become more skilled and therefore more marketable, they look for more promising opportunities outside the company.

Such brain drain can hurt a company’s productivity and bottom line as knowledge and high-demand skills walk out the door.

Harassment Claims

As the impact of the #MeToo movement grows, victims of sexual harassment and sexual assault are coming forward in unprecedented numbers.

In a family business, harassment claims can be even more disruptive than in a non-family enterprise.

In all businesses, harassment claims are often viewed as personal and generate emotional responses.

The alleged victim accuses the alleged harasser of personally engaging in discrimination or harassment.

Not surprisingly, the accused tends to take the allegation personally—a response often intensified in a family-owned business because the lines between business and family can be blurry.

The problem can be exacerbated when the alleged harasser is a family member, leading to distrust and discord throughout the company and the family.

For example, in situations where a married couple runs a business and one spouse is accused of harassment, the other spouse will likely regard it as an act of personal disloyalty if the alleged unlawful actions are found to have merit (and maybe even if they’re not).

The result is a bad situation that can threaten the future of the company.

What You Can Do

Here are a few suggestions for addressing those challenges:

  • Make succession planning a priority. While succession planning may be burdensome, it’s critical to a family business’s survival. Moreover, since no one is guaranteed tomorrow, many family businesses struggle with the unexpected loss of a key family member—one more reason to take time now to plan for a smooth succession.
  • Focus on transparency to retain key talent. One key way to bolster non-family member retention and loyalty is through calculated transparency. While it seems like a cliché, most employees want to know how they fit into the organization and its future. So, be transparent when it comes to an employee’s future role, even if you see limited advancement potential.
    Objective criteria should be used to determine if a family member is qualified for a job.
    If the employee decides to move on, it’s better that the decision is made now rather than after your company becomes more dependent on the person’s skills or institutional memory. Another component of transparency is ensuring family members do not receive positions or promotions just because they are related to the owner; their qualifications should be the deciding factor. Just as in any other company, objective criteria should be used to determine if a family member is qualified for a job.
  • Review your company’s sexual harassment policy. When it comes to reporting harassment complaints, family businesses should examine their reporting structure and ensure that employees have the option of expressing concerns to a non-family member. Having that avenue is particularly important where an allegation of misconduct must be brought against a family member. Otherwise, employees may be reluctant to voice a complaint—and the courts are likely to find this leads to an ineffective sexual harassment policy.

About the authors: Robert Brody is the founder and managing member of the law firm Brody and Associates LLC in Westport. Katherine Bogard is an associate with the firm.