Research shows that two out of three family businesses do not survive into the next generation. And not just from the first generation to the second, but from any generation to the next.
Because family businesses make up more than 70 percent of all businesses, the tally of closures can add up.
There is a lot of information available on what the central causes are for family business failures – and thus, some guidelines on how to avoid them.
Here are some of the top success strategies for those family businesses that do survive and even thrive:
1) Keep the lines of communication open. Communication is critical. When I once asked publisher Steve Forbes at the N.C. CEO Forum what advice he would give to a family businesses, he declared that communication was the most important element to success for his family’s business. McKay Belk, grandson of the founder of Belk retail stores, and Frank Holding Jr., of the Raleigh-based, family-controlled First Citizens Bank, both agreed.
It is also important to be proactive: Schedule family meetings to discuss topics such as business transition, business performance, and responsibilities. Most of all, don’t let issues fester.
2) Assign clear roles and responsibilities. As a family member, there is a natural tendency to feel everything is my business. However, not everything is every family member’s responsibility. Without job definitions, family members will be on top of each other working the same problem. Elaine Voci, Founder of Voci Spa in Charlotte, agrees: “It is important that each family member have clearly defined roles in order to operate smoothly.”
3) Keep good financial data. The downfall of many small businesses and family businesses is not having solid data.
“Accurate financial data is essential, especially when you are trying to raise capital in a fast-growing industry like we are,” said Sally Crowell of Crowell Systems in Charlotte, which provides software to health care clients.
I had a client who predicted a 3-4 percent net income increase at year end, only to learn that the company was down 2 percent because of incompetent accounting. All the plans that were being made for growth had to be redirected to cost savings.
4) Avoid overpaying family members. Market-based compensation is fundamental and essential. Parents in family businesses tend to overpay the next generation, or pay them the same. Both are bad practices. A family business I worked with paid each of the four family members the same salary, even though they had very different responsibilities. Certainly the president should receive higher compensation than his brother who, while quite good, was a blueprint designer. The longer unfair compensation practices continue, the messier it will be to clean up when it blows up.
5) Don’t hire relatives if they are unqualified. Competence is key. Family businesses are a conundrum: The family aspect generates unqualified love, while the business side cares about profits. Thus, family members will be hired to give them a job, even though they are not qualified. The remedy is to get them trained, move them to a role that matches their skills, or have them leave.
High-functioning family businesses can outperform nonfamily businesses on a number of metrics. Trust is the driver. But when trust breaks down, the business suffers, placing a significant strain on family harmony. Adhering to the above five rules, while uncomfortable, can keep a family and business on the track to success and help avoid being one of those that does not survive.
Henry Hutcheson is a speaker, author and president of the consulting firm Family Business Carolina. Email your questions about family business to Henry@familybusinesscarolina.com.
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