Nearly 70 percent of the private businesses in the U.S. are family businesses.
These companies can be great places to work, providing a culture that is enriching and safe, and feels like, well … family.
This culture, along with their tendency to have longer time horizons, propels them to consistently outperform nonfamily businesses.
But like nearly everything, there is another side.
Family businesses are confronted with several different and challenging paradoxes that their nonfamily counterparts do not face. For example, families are inherently socialistic, and parents try to treat all children the same.
Businesses, on the other hand, are capitalistic, where those who contribute most to the success of the business reap the greatest rewards.
Conflict arises when family members have opposite beliefs on whether the family or business comes first.
For example, do you get into the family because of your last name, or does a position need to be open, where you apply, and go through the interview and selection process like everyone else?
Family first viewpoint says you get in because of your last name, and everyone is paid the same. The business-first viewpoint argues that employment is not an entitlement and pay should be based on the skills and contributions of each individual.
Another paradox is whether to harvest the profits of the business or invest them in growth.
The exiting generation is likely getting more conservative about investing in the business, as it is looking to de-risk its investment. The next generation is eager to increase leverage and take on risk to grow the business.
Family businesses tend to have no outside directors or advisers helping the company make these decisions. This means there is no one to keep the family member CEO accountable to make the right decisions.
The CEO is typically making financial decisions at the intersection of what is best for the company and what is best for his or her family. All decision-making typically starts and ends with the family members of the management team, even if outside managers are involved.
This matters because the worst-case scenario is joining a business that states its approach to growing the business is with a business-first mindset, and then those types of strategies and decisions get derailed by the personal needs of the family.
For example, a business may need outside capital to be successful in hitting its goals. A family member may decline to dig into his or her own pocket for those funds (as it may be better spent on a child’s college education, in his or her mind), and may be unwilling to raise it from outside investors (as he or she doesn’t want to deal with the change in 100 percent control that it has today).
Family businesses struggling with issues such as these put strains on the relationships between the family members and the nonfamily members who are part of the management team.
When you look to join a new company that is family owned and operated, it is critical to do your homework.
Lean toward family owned companies that have professional outside boards of directors or advisers who can help keep the family executives educated and accountable on the best ways to realistically build a business. Equally important, make sure the family considers and follows through on those improvement plans.
Otherwise, be prepared to work for some family’s lifestyle business, where the only opinions that are truly listened to are its own.
Driving real growth will be hard to achieve, and decision-making will be unpredictable.
Tom Garrity is managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to family businesses. He can be reached at 610-336-0514 or firstname.lastname@example.org.