Evolution Accelerator

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Considerations to Make Before Starting a Family Business

Updated: Jan 30

The owners and managers of family businesses face many unique challenges. These challenges stem from the overlap of family and business issues and include communication, employing family and nonfamily members, professional management, employment qualifications, salaries and compensation, and succession.


Communication

Communication is important in any business, but the complexities of communication in a family business are particularly problematic. Experts say that communication is one of the most difficult parts of running a family business. The approach to communication needs to include commitment, the avoidance of secrecy, and an understanding of the risks of bad communication.


Commitment

In a family business, it is critical that there be a commitment to communicate effectively with family and nonfamily members of the business. Business leaders should be open about their awareness of the potential for communication issues to evolve and their willingness to accept feedback and input from all employees about opportunities for improvement and areas of concern.

Secrecy

In family businesses, it is particularly important not to convey the impression that family members are more in the know than other employees. Even when this is not the case, the potential for the perception of exclusivity may exist. Steps should be taken to address any issues that may arise openly, honestly, and without preference for family members.

Risks of Bad Communication

If good communication channels are not in place, the following can occur:

Family members assume they know what other family members feel or want.


Personal ties inhibit honest opinions being expressed. The head of the family may automatically assume control of the business even if they don’t have the best business skills. One family member ends up dominating the business. Family-member shareholders not active in the business fail to understand the objectives of those who are active and vice versa.


These difficulties can be overcome if the family business makes a concerted effort to create and maintain an environment of open communication where people feel comfortable voicing opinions and concerns. It is important that family and nonfamily members have an equal opportunity to express their views.


Employing Family and Nonfamily Members

It is natural for a family business to employ family members, especially in management positions. Family members tend to be the first people hired when a small business gets started, and as the business grows, so do their roles. There are both pros and cons to hiring family members. Both need to be considered carefully. Who to hire may well be the biggest management challenge that a family business owner faces.


Pros

On the positive side of things, several advantages can be identified for hiring family members:

  • Improved customer relations through family contact

  • Intergenerational continuity

  • Long-term stability

  • Shared values

  • Loyalty and commitment

  • Inherent trust

  • Willingness to sacrifice for the business

  • Emotional attachment to the business; more willing to contribute to its success

  • Share the same culture

Cons

There are also quite a few disadvantages to hiring family members:

Families are not perfect, so a dispute among family members can spill from home into the workplace.

  • There is always the possibility of managerial incompetence. It may not be possible to separate family and work.

  • Patterns of conflict will be rooted in early family experiences.

  • Communication may breakdown.

  • Sibling rivalry may create problems.

Newly hired family members may feel that they do not have to earn their positions; their success will be seen as linked to their name instead of their abilities.

  • The company may be subject to charges of discriminatory hiring practices if job openings are not published.

  • Nonfamily members of the business may feel that family members get hiring preference. Nonfamily members may feel that they will be automatically outvoted in decision making.

  • Hiring primarily family members for management positions may lead to hiring suboptimal people who cannot easily be dismissed. This could lead to greater conflict because of promotion criteria that are not based on merit.

Hiring Non-family Members

There will be times when the better decision may be to hire a non-family person for a particular job. Experience has shown that a family business is less likely to be successful if it employs only family members; bringing in the fresh thinking that comes with external expertise can be valuable at all levels of a business. In addition, nonfamily members can offer stability to a family business by offering a fair and impartial perspective on business issues.



Because it is likely that a growing family business will need to hire people from the outside, it is important that the business come to terms with that necessity. Policies and procedures can help with the transition, but the most important thing is to prepare the family culture of the business to accept a non-family member. Not surprisingly, this is much easier said than done.