- Discover the impact family businesses have on the American economy.
- Learn about the pitfalls of starting and running a family business.
- Discover best practices for making sure your family business succeeds.
At its core, a family business is exactly what it sounds like: a company or other enterprise owned, operated, and actively managed by at least two people from the same family. This can be a parent and their kids, two siblings, or some other configuration. It doesn't actually matter, as the management is made up of people with some type of similar close relation.
According to one recent study, family businesses make up between 80% and 90% of all business enterprises in North America. They contribute approximately 64% to the gross domestic product of this country, equaling roughly $5 trillion every year. Not only that, but they also comprise around 60% of the workforce. This makes their contribution every bit as significant as it is comprehensive.
Having said that, as is true with so many other types of businesses, simply beginning an enterprise with someone you trust isn't nearly enough to guarantee success. Family organizations often fail the same as others do. If you truly want to make sure that yours gets off on the right foot, Fiducial has a few key things to keep in mind.
Family Business Pitfalls
Obligation vs qualifications
By far, the biggest thing to understand about running a successful family business is that not every family member necessarily has a place in the proceedings.
Indeed, experts agree that this is one of the major traps that most new entrepreneurs tend to fall into. Most feel a deeply-rooted obligation that kids or other relatives "need" to join the company. While a kind gesture, this could also create a situation where people with authority feel no investment.
For parents trying to bring their kids into the business, it's far more beneficial to create a situation where they feel free to join the organization should they so choose. It shouldn't feel like an obligation to them, as that will only cause problems later on.
Along the same lines, not every family member is necessarily qualified for this level of responsibility. This is a similar issue that causes problems from a different perspective. Experience still needs to be the driving force behind what role someone will be given in an organization if any.
There's no sense in bringing someone with no experience into an industry and elevating them to a position of authority simply out of some sense of obligation. Doing so isn't just doing them a disservice — it also dramatically increases the chances that the business will ultimately fail.
Build to scale
Another major pitfall that many family businesses fall into is where the organization simply cannot grow fast enough to support everyone at the same time. If one were to start a business and immediately give their four kids management-level positions, especially in those early days, there might not be enough work to go around. There certainly may not be revenue to support those salaries, either.
Instead, all family businesses need to be created in a strategic way that allows them to grow and scale over time. Only bring new members into the fold when the time is right. As the organization gets larger, there may be enough revenue and work to support additional family members. Only then should the business consider new entries.
Best Practices
Communication
Beyond that, there are several essential best practices to lean into that can help increase the chances of success for any family business. Communicating openly and often with all parties is critical. You must make sure that everyone is always on the same page and moving in the right direction. Family members need to be kept abreast of major decisions regarding the company's trajectory and the reality of competitive challenges.
Values
Similarly, it's always important to solidify the values of the family — and thus the business — as early on in this process as possible. Before you even begin to think about a direction for the business, consider how this path might impact the family.
If everything is overwhelmingly successful, what will that look like? What does each participating family member see happening in five or even ten years? This should be identified from their point of view and in the overarching sense of the company. What does the organization stand for? What entity is best for succession and taxes? Who is it dedicating itself to serving? Also, does everyone agree on these things?
The answers to these questions need to impact many of the decisions that one will make moving forward.
Respect
In the end, if you're going to be starting a family business in a leadership position, you also need to respect everyone involved. Remember that just because they're relatives doesn't mean that they cannot bring fair value to the table. They're not there to simply take orders. They're there to offer a unique perspective that you might not have access to through other means.
If one or more of your children don't want to join the family business, that's okay. However, the qualified ones who do should be given the room they need to perform to the best of their abilities. Sometimes that means allowing them to give their objective, third-party opinions — even when they don't necessarily align with your own.
Sometimes it means them taking a role in the company that you didn't necessarily see for them, so long as it is one at which they excel.
Following these best practices means that you'll end up with something more effective than a traditional family business. You'll have a true legacy that has the potential to last several generations — which in and of itself is the most important benefit of all.
Feel free to reach out with any questions or concerns in running and managing your family business. Thinking of succession or possible sale? It takes careful advance planning. Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave.