How to create generations of family business profits

Family-owned businesses are the backbone of the American economy and include vast corporations such as Porsche, Walmart and even Samsung. Larger entities account for more than 30 percent of all companies with sales in excess of $1 billion.

And while building a family business is hard, successfully passing it to future generations is even harder. In fact, 70 percent of family businesses don’t make the transition to the second generation.

But why? Family businesses have to contend with not only the risk of business factors, but also family factors. The special connection family members feel with the business can provide a good start for rising above individual self-interests. You also need helpful strategies to maintain healthy boundaries.

Major characteristics differentiate typical businesses and family organizations: 

Consider the golden goose analogy and protecting the goose and her golden eggs from the fox (primary competitors) as the key objective. Keep the goose safe and it will lay golden eggs. If the owner gets too fixated on the eggs instead of the goose, the fox may prevail.

A well-managed business provides financial rewards and psychological benefits through individual contributions. When the family is cared for and treated fairly, they provide the same for the business. As family members value their respective stake, they’ll stay focused on organizational performance and taking pride in their work. The lesson is clear -- the goose continues to produce dividends through the combined efforts of family members.

Keep everyone engaged by setting meetings regularly with an agenda focused protecting, sustaining and complementing each other, even under challenging business conditions. Share information about benefits family members can expect – including income assurance, vacations, retirement funds and lifestyle rewards.

The right commercial banking officer can help you resolve the more in-depth issues, such as financial challenges and operational needs that are unique to the DNA of a family-owned business. Consider asking for guidance to help you navigate common dynamics effectively and fairly:

• Succession, estate and tax planning
• Transition planning and generational factors
• Buy-sell arrangements
• Financial or cash flow modeling
• Wealth and asset management
• Businesses involving multiple heirs
• Liquidity for second- or third-generation owners

• Put an employment policy in place. Spell out the details for all stakeholders, including the expected behavior and performance of family employees. Specify the hiring process (who decides and how), as well as requirements related to age, education, skills and outside work experience.
• Design a performance evaluation policy that fits the organization. Invite family members to voice recommendations on what’s most important to assess. The context should be on keeping the best and brightest individuals.
• Reduce personal risk for non-family managers. Managers hired from outside the family are likely attuned to risk in the work environment. By having a clear employment policy in place, workers who are not family members won’t worry about unfair job competition.
• Establish compensation policies grounded in fairness. Owners want profitable results and need capable managers with the right skills, experience and judgment. Preferential compensation for under-qualified managers and workers, whether family or non-family members, undermines the concept of an evenhanded approach and merit-based rewards. Family employees should be compensated in the same manner as non-family employees and remuneration should be rooted in a fair market value analysis.

Family businesses have been an American tradition for generations. Day-to-day operations and decisions can seem overwhelming when mixed with the emotional energy of family relationships. But when viewed from the vantage point of the greater good, planning and sustaining a family business can bring together collective strengths working toward the prize: more golden eggs. Start with bringing together the family business structures and processes that will help keep the firm on the path to profitability.[cite::171::cite][cite::172::cite]