Source: Used with permission, Michael Larivere, manager, Westbrook Lobster, Wallingford, CT.
In 1957, Westbrook Lobster opened in Westbrook, Connecticut, as a specialized lobster and fish market. As time went on, the company expanded to offer a comprehensive range of fish, shrimp, and prepared foods. In 1989, Larry Larivere, who grew up near the docks of New Bedford, Massachusetts, bought the business and had a dream of expanding the business with a seafood restaurant.
Fast forward to 2004. Larry and his two sons, Michael (an environmental science major) and Matthew (a business major), opened up their second restaurant in Wallingford, Connecticut. It overlooks the Quinnipiac River in the historic Yale Brother’s Mill built in the late 1670s. Originally a grain mill, later converted to a German and Britannia silver spoon factory, and finally converted into a restaurant, the building was rich with history.
Michael speaks easily about the value that Westbrook Lobster offers its customers: high quality food, great service…and visiting the tables while people are dining. He sees these visits as an important part of the relationships that he has built with his customers over the years. Westbrook customers eagerly await the monthly postcards that are sent out that feature dining specials, discounts, and coupons. He tries to get the postcards out early and actually receives phone calls if they are not received early. Many people have come to depend on them. Michael says that these postcards definitely give the restaurant its greatest return. The restaurant has a presence on Facebook, but that is geared to the bar crowd—a younger crowd.
Technology plays an important but mixed part in the restaurant’s operations. Michael says that it is tough to run a restaurant these days without technology tools like POS (point of service) systems. These systems include touch screens for placing orders and paying for food items. Interestingly, however, most food vendors still do their business face to face (or telephone to telephone), choosing to stick with personal relationships. Only a few suppliers, such as liquor vendors, accept orders online.
The current Westbrook Lobster website was created by Michael and Matthew using services from intuit.com. They built the site themselves and are proud to note that restaurant gift cards can now be purchased directly from the site. This is a perfect example of Web 2.0 capabilities.
As far as running the business, currently fifty employees strong, Larry Larivere (Dad) is brought in on the big decisions. Otherwise, Michael and Mathew run the restaurants on their own. There are currently no other family members in the business.
Westbrook Lobster continues to provide the freshest seafood available at competitive prices. The daily selection includes everything from locally harvested shellfish to fresh fish from waters up and down the East Coast. They also offer several “healthy” options that are made without butter or bread crumbs. These menu items are very popular and are especially attractive for people with food allergies or people who just want to eat a bit lighter. All their efforts continue to pay off. Westbrook Lobster was voted “Best Seafood Restaurant Statewide” in Connecticut Magazine 2009 and “Best Seafood in New Haven County” in Connecticut Magazine 2009 and 2010.
Larry, Michael, and Matthew invite you to Westbrook Lobster when you are in the area. Once you are there, you are family.
Source: “The Lobster Tale,” http://www.westbrooklobster.com/Wallingford/pages/wally_home.html (accessed on October 8, 2011) and interview with Michael Larivere, October 11, 2010.
“Family businesses are different.”“Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf.
BDO 2009 Report: “Focusing on Business Families”
There is no agreed-on definition of a family business. The percentage of ownership, the strategic control, the involvement of multiple generations, and the intention for the business to remain in the family are among the many criteria that experts use to distinguish family businesses from other types of businesses.Joseph H. Astrachan and Melissa Carey Shanker, “Family business’s Contribution to the U.S. Economy: A Closer Look,” Family Business Review 16, no. 3 (2003): 211–19. For the purposes of this chapter, however, a family businessA business that is actively owned and/or managed by more than one member of the same family. is defined as a business that is actively owned and/or managed by more than one member of the same family.“Family Businesses,” Entrepreneur, 2010, accessed October 8, 2011, www.entrepreneur.com/encyclopedia/term/82060.html. A family business can also be defined as the result of someone’s dream:
The story of every successful family business starts with someone who has the passion, confidence and courage to put his [or her] money where his [or her] mouth is…[These entrepreneurs] work incredibly hard, make things happen, are positive without being unrealistic and possess the resourcefulness to overcome all sorts of hurdles. They are also socially adept, capable of communicating effectively and good at inspiring others…“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.
Family business owners know that their roles are different from that of shareholders in companies owned by many public investors. In addition, “employees in family businesses know the difference that family control makes in their work lives, the company culture, and their career. Marketers appreciate the advantage that the image of a family business presents to customers. And families know that being in business together is a powerful part of their lives.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 1.
Because of the private nature of most family businesses, it is difficult to obtain accurate information about them.Joseph H. Astrachan and Shanker, “Family business’s Contribution to the U.S. Economy: A Closer Look,” Family Business Review 16, no. 3 (2003): 211–19. Complicating the situation is that most data sources do not distinguish between small family businesses, such as the local pizza parlor or deli, and large family businesses, such as Walmart, Mars, and Ford. “The reality is that family-based operations are represented across the full spectrum of American companies, from small businesses to large corporations.”“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm. Within this context, the following has been observed:“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm; and Stacy Perman, “Taking the Pulse of Family Business,” February 13, 2006, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/feb2006/sb20060210_476491.htm.
What this means is that family businesses continue to be a powerful economic force, no matter what their size and no matter how they are defined. “Family firms are the most common form of business structure; they employ many millions of people; and they generate a considerable amount of the world’s wealth.”“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.
The focus of this chapter is on the small family business.
Mother and Daughter Partner in Family Business
A mother and daughter partner in a jewelry business.
video.answers.com/small-business-stories-mother-and-daughter-as-business-partner-132888892
There are benefits to a family business, but there are disadvantages that must be considered as well. Starting a family business is not for everyone.
A family business offers the following advantages:
Iron Horse Barbecue
A family-owned business that is helping other business fire up businesses of their own.
video.answers.com/small-business-stories-iron-horse-barbecue-124662002
“If family businesses are so common, how can they also be special? When Freud was asked what he considered to be the secret of a full life, he gave a three-word answer: ‘Lieben und arbeiten [to love and to work].’ For most people, the two most important things in their lives are their families and their work. It is easy to understand the compelling power of organizations that combine both. Being in a family firm affects all the participants. The role of chairman of the board is different when the company was founded by your father and when your mother and siblings sit around the table at board meetings, just as they sat around the dinner table. The job of a CEO is different when the vice president in the next office is also a younger sister. The role of partner is different when the other partner is a spouse or a child. The role of sales representative is different when you cover the same territory that your parent did twenty-five years earlier, and your grandparent twenty-five years before that. Even walking through the door on your first day of work on an assembly line or in a billing office is different if the name over the door is your own.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 2–3.
As attractive as family businesses are on many fronts, they have the following disadvantages:
Not all children of owner-managers may want to join the business. According to one study,Sue Birley, “Attitudes of Owner-Managers’ Children towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19. 80 percent of those who did not work in the family business did not intend to go into the business. This reluctance comes from several directions, such as the following:
Why Some Children of Owner-Managers Do Not Want to Join the BusinessSue Birley, “Attitudes of Owner-Managers’ Children towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.
I see the pressure my dad is under—this does put me off slightly. I want to enjoy my job as well as enjoying life outside work.
A larger factor when working under a relative is the problem of self-worth. It is hard to feel like you are worth something when your father is an MD.
A business relationship with your father makes your family relationship harder.
I do not look to go into the family business straight away, as I feel this is giving a commitment to work there for the rest of my life.
I would join only because I am genuinely qualified, not because I am the owner’s daughter.
The difference in my father’s education and mine is a factor affecting why I have decided not to go into the business. I have more choice over what I want to do as a career, and my personal interests would not be met by my father’s company. I am sure it would not have been his choice had he had the same educational choices as me.
As much as the route into the family business is seen by outsiders as an “easy route to wealth and inheritance,” in my case it was also a liability. At 17, was I to be the fourth generation after 100 years that could not keep the company going?
Looking at the vision and hard work of the founders, family businesses “take on their unique character as new members of the family enter the business. At best, the environment can be inspiring and motivating. At worst, it can result in routine business decisions becoming clouded by emotional issues.”“Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf.
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 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.Christine Lagorio, “How to Run a Family Business,” Inc., March 5, 2010, accessed October 8, 2011, www.inc.com/guides/running-family-business.html. The approach to communication needs to include commitment, the avoidance of secrecy, and an understanding of the risks of bad communication.
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.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed June 1, 2012, http://smallbusiness.chron.com/family-owned -business-communication-3165.html.
One important issue is whether there should be a line drawn between family and business discussions. Some suggest that setting up strict guidelines from the start that draw a clear line between the different types of discussions is a good approach.Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html. By contrast, the Praxity Family Business Survey“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, http://praxityprod.awecomm.com/News/2009/Pages/UKFamilyBusinessSurvey.aspx. found that it is considered OK to talk about the business anywhere and at any time, whether at work or at home:
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.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html.
If good communication channels are not in place, the following can occur:
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.
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.Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the -family-business-a220028. 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.
On the positive side of things, several advantages can be identified for hiring family members:Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html; and Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the-family -business-a220028.
“A family whose members work well together can also give the business a welcoming and friendly feel. It can encourage employees who aren’t in the immediate family to work harder to gain acceptance by those employees who are.”Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the -family-business-a220028.
There are also quite a few disadvantages to hiring family members:Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html; Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the-family-business -a220028; Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69; and Margaret Steen, “The Decision Tree of Family Business,” Stanford Graduate School of Business, August 2006, June 21, 2012, www-prd-0.gsb.stanford.edu/news/bmag/sbsm0608/feature_familybiz.html.
Families are not perfect, so a dispute among family members can spill from home into the workplace.
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.
There will be times when the better decision may be to hire a nonfamily 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.“Focusing on Business Families,” BDO, November 2009, accessed October 8, 2011, static.staging.bdo.defacto-cms.com/assets/documents/2010/04/Focusing_on _business_families.pdf. In addition, nonfamily members can offer stability to a family business by offering a fair and impartial perspective on business issues. The challenge is in attracting and retaining nonfamily employees because these employees “may find it difficult to deal with family conflicts on the job, limited opportunities for advancement, and the special treatment sometimes accorded family members. In addition, some family members may resent outsiders being brought into the firm and purposely make things unpleasant for nonfamily employees.”“Family Owned Businesses Law and Legal Definition,” USLegal.com, 2010, accessed October 8, 2011, definitions.uslegal.com/f/family-owned-businesses. 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 nonfamily member. Not surprisingly, this is much easier said than done.
The decision to hire a professional managerAn external, nonfamily, nonowner manager. is likely one of the most important and difficult hiring decisions that a family business owner will have to make. The typical definition of professional managers equates them with external, nonfamily, nonowner managers, thus declaring professional management and family management as mutually exclusive.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. “A typical argument…is that professional nonfamily managers should be brought in to provide ‘objectivity’ and ‘rationality’ to the family firm.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
There are several problems with this way of thinking. First, it perpetuates the outdated notion that family members are not professional, that the smartest thing for a family business to do is to bring in professional management—as quickly as possible.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
Second, professional managers are not always prepared to deal with the special nature of family-owned businesses. “The influence of families on businesses they own and manage is often invisible to management theorists and business schools. The core topics of management education—organizational behavior, strategy, finance, marketing, production, and accounting—are taught without differentiating between family and nonfamily businesses.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 4. This does an injustice to the unique workings of a family-owned business.
Third, a professional manager from the outside is not always prepared, perhaps not even most of the time, to deal with the special nature of family companies. The dominant view on professional management downplays the importance of the social and the cultural context. “This is a problem in family firms where family relations, norms, and values are crucial to the workings and development of the business.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. It is argued that the meaning business families attach to their businesses is guided by family values and expectations—so much so that “anything or anyone that interrupts this fragility could send the business into chaos.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
The hiring of an outside manager, therefore, should include an assessment of both formal competenceFormal education, training, and experience outside the family business. and cultural competenceAn understanding of the culture of a specific firm.. Formal competence refers to formal education, training, and experience outside the family business. Although it is certainly helpful and appropriate, formal competence is not sufficient for managerial effectiveness. It needs to be supplemented with cultural competence, an understanding of the culture of a specific firm. Interestingly, most family businesses look only to formal competence when selecting a CEO.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
It is extremely important to understand the culture of the family firm. It means that as a leader you have to be sensitive to the organization’s reactions on the things you say and do. I have a long-term employee on my management team, and she is my guide in these issues. She can tell me how the organization will react and how things are likely to be received. We have to build on the past even though we have to do a lot of things in new and different ways. But because of the culture, this might be very sensitive. (The words of a nonfamily CEO in a family business.)
As a nonfamily CEO, you have to have in-depth respect for the invisible forces among the employees in the family firm. You cannot escape the fact that there will always be special bonds between the family firm and the owner. Always. (The words of a nonfamily CEO in a family business.)Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.
One concern of family businesses may be that the hiring of a nonfamily manager will result in the loss of their “familiness.” However, one study found that, even with nonfamily managers bringing nonfamily management activities, styles, and characteristics, “the special and unique aspects and forces of the system of the family, its individual family members, and the business itself provide a synergistic force that offsets the outside influences of the [nonfamily managers].”Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209. This same study acknowledged, however, that their research did not focus on understanding at what point, or percentage of nonfamily members, the feeling of “familiness” will begin to erode.Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209.
One of the more difficult challenges that a family business must face is determining employment qualifications for employees, both family and nonfamily. The lack of a clear employment policy and process can lead to major conflicts in the company. Unfortunately, it would appear that, despite their benefit, most family businesses have a family employment policy.“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf. As a result, many family businesses may end up with more employees from the family than the company needs, and some of these people may not even be qualified or suitable for the jobs they have been given. “Some family businesses even find themselves acquiring businesses that have no relationship with their original business or keeping some unprofitable business lines just to make sure that everybody in the family gets a job within the company.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1 -SABIS%C2%AE-. This kind of situation benefits no one.
A written family-business employment policy can solve a myriad of problems because it spells out the specific terms for family and nonfamily members with respect to recruiting, hiring, promoting, compensating, and terminating. One recommendation is that an ideal family employment policy should include the following:“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf.
Others have recommended “that family members meet three qualifications before they are allowed to join the family business on a permanent basis: an appropriate educational background; three to five years’ outside work experience; and an open, existing position in the firm that matches their background.”Craig E. Aronoff and John L. Ward, Family Business Succession: The Final Test of Greatness (Marietta, GA: Business Owner Resources, 1992), as cited in “Nepotism,” Reference for Business.com, 2010, accessed October 8, 2011, www.referenceforbusiness.com/small/Mail-Op/Nepotism.html.
There are no rules that dictate the content of a family business employment policy, so differences from one family business to another can be expected. However, it is very important “to set employment conditions that do not discriminate against or favor family members. This would help establish an atmosphere of fairness and motivation for all employees of the family business.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1-SABIS%C2% AE-.
The benefits of an employment policy notwithstanding, the idea may be met with resistance. There may be the feeling that hiring decisions for family members should be separate from the hiring decisions for nonfamily members because being a family member provides special qualifications that cannot be matched by someone outside the family. How to proceed will ultimately fall on the shoulders of the family business owner.
As difficult as hiring decisions may be for the family business, decisions about salaries and compensation are probably even worse. No matter how well intentioned and well designed the company’s compensation plan may be, there will still be jealousies, hard feelings, severed sibling relationships, and even lawsuits, particularly among those family members who feel they have been treated unfairly.“Family Owned Businesses: Compensation in Family Businesses,” Gaebler.com Resources for Entrepreneurs, 2010, accessed October 8, 2011, www.gaebler.com/Compensation-in-Family-Businesses.htm. This presents a daunting challenge: how to develop a compensation plan that will be fair to family members and good for the business:
One of the greatest struggles of operating a family business is separating the family from the business. Oh yes, there are many great benefits to having family in the business and to being a family member in a family business, but the most difficult problems result when “family values” and issues take over, leaving business values and needs wanting. There is no greater source for family business problems—nor more fertile ground for their cure—than the family business compensation systems.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344.
Family businesses often make several common mistakes when developing their compensation plans.
The business overpays family members—for a variety of reasons:Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
Emotional pressures are allowed to determine compensation policies. What this means is that compensation is not correctly determined by job requirements and performance in those jobs. When this happens, small problems develop centrifugal force:Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
Developing a fair compensation plan for the family business is not easy. It requires good faith, trust, and good business sense. The dollar amounts offered to family members will be critical, but the more pressing issue is fairness.Dean Fowler and Peg Masterson Edquist, “Evaluate the Pros and Cons of Employing Family Members,” Business Journal, June 6, 2003, accessed October 8, 2011, www.bizjournals.com/milwaukee/stories/2003/06/09/smallb6.html. Unfortunately, fairness is often construed as equality. This must be avoided.
There is no template for designing a compensation plan for family businesses, but there are several recommendations:Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344.
Family members employed in the business will be paid according to the standards in our region, as reported by our trade association, for a specific position, in companies of our size. In order to retain good employees we will pay all employed family members and other managers within the top quartile of our industry’s standards. Additional compensation will be based on success in reaching specific company goals, with bonuses shared among all members of the management team. Individual incentives will be determined according to measurable goals for job performance determined each year, and reviewed by the appropriate manager.Ellen Frankenberg, “Equal Isn’t Always Fair: Making Tough Decisions about Transmitting Family Assets,” Frankenberg Group, 2010, accessed October 8, 2011, www.frankenberggroup.com/equal-isnt-always-fair-making-tough-decisions-about -transmitting-family-assets.html.
A recent family business survey“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, http://praxityprod.awecomm.com/News/2009/Pages/UKFamilyBusinessSurvey.aspx. reported that the following things keep family business owners awake at night.
| Rank | The Nightmare | Percentage Citing as a Significant Concern (%) |
|---|---|---|
| 1 | Family members can never get away from work. | 18 |
| 2 | Business disagreements can put strain on family relationships. | 17 |
| 3 | Emotional aspects can get in the way of important business decisions. | 16 |
| 4 | Transition to the next generation is more difficult than a third-party sale. | 10 |
| 5 | There can often be conflicts regarding the fairness of reward for effort. | 9 |
| 6 | The business rewards are not necessarily based on merit. | 8 |
| 7 | Family members find it difficult to be individuals in their own right. | 5 |
| 8 | Difficulties arise in attracting professional management. | 5 |
| 9 | Children can be spoiled through inequitable rewards. | 4 |
| 10 | Outside shareholders do not contribute but take payouts from the business. | 3 |
| 11 | The family is always put before the business and therefore can be less efficient. | 3 |
| 12 | Past deeds are never forgotten and are brought up at inappropriate times. | 2 |
Other urgent issues identified by a different family business survey included, in order of importance, the following:“American Family Business Survey,” Mass Mutual Financial Group, 2007, accessed October 8, 2011, www.massmutual.com/mmfg/pdf/afbs.pdf.
Another important issue that is particularly difficult for family businesses is succession. As mentioned earlier in this chapter, succession is about passing the business to the next generation. Decisions have to be made about who will take over the leadership and/or ownership of the company when the current generation dies or retires.“Family Owned Businesses Law and Legal Definition,” USLegal.com, 2010, accessed October 8, 2011, definitions.uslegal.com/f/family-owned-businesses. Interestingly, “only a third of all family businesses successfully make the transition to the second generation largely because succeeding generations either aren’t interested in running the business or make drastic changes when they take the helm.”“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm. There are family businesses that manage the transition across generations quite easily because the succession process chooses only the children willing and able to join and work with the prevailing family, business values, and goals. Unfortunately, there are also instances in which children have had to leave school as soon as legally allowed, not equipped to manage either the business, their lives, or their family. These children spend many resentful years in the business until it fails.Sue Birley, “Attitudes of Owner-Managers’ Children Towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.
Passing the family business to the next generation is a difficult thing to do, but succession is a matter of some urgency because 40 percent of US businesses are facing the issue of succession at any given point in time.Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf. This urgency notwithstanding, there are several forces that act against succession planning:Ivan Lansberg, “The Succession Conspiracy,” Family Business Review 1 (1981): 119–44, as cited in Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf.
Founder
Family
Employees
Environmental
These are powerful forces working against succession planning, but they need to be overcome for the good of the founder, the family, and the business. It will be tricky to balance the needs of all three and fold them into a good succession plan.
Voyageur Transportation, a company in London, calls its successful succession planning program, “If you got hit by a beer truck, what would happen to your department?”“Sample Succession Planning Policy,” accessed October 8, 2011, www.experienceworks.ca/pdf/successionpolicy.pdf. As a family business owner, you should pose this question in terms of yourself and your business. Hopefully, this will provide the impetus you need to develop a succession plan.
A good succession plan outlines how the succession will occur and what criteria will be used to judge when the successor is ready to take on the task. It eases the founder’s concerns about transferring the firm to someone else and provides time in which to prepare for a major change in lifestyle. It encourages the heirs to work in the business, rather than embarking on alternative careers, because they can see what roles they will be able to play. And it endeavors to provide what is best for the business; in other words, it recognizes that managerial ability is more important than birthright, and that appointing an outside candidate may be wiser than entrusting the company to a relative who has no aptitude for the work.“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.
A good succession plan will recognize and accept people’s differences, not assume that the next generation wants the business; determine if heirs even have enough experience to run the business; consider fairness; and think and act like a business. The plan should also include a timetable of the transition stages, from the identification of a successor to the staged and then full transfer of responsibilities, and a contingency plan in case the unforeseen should happen, such as the departure or death of the intended successor or the intended successor declining the role.“Family-Run Businesses: Succession Planning in Family Businesses,” Business Link, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type =RESOURCES&itemId=1074446767. It would also be helpful to get some good professional advice—from company advisors who have expertise in the industry as well as other family-run businesses.“Avoid Feuds When Handing Down the Family Business,” 2010, AllBusiness.com, 2010, accessed October 8, 2011, www.allbusiness.com/buying-exiting-businesses/exiting-a-business/2975479-1.html.
Although each succession plan will be different, the following components should be seen as necessary for a good succession plan:“Components of a Good Business Succession Plan,” April 18, 2011, accessed October 8, 2011, www.entrepreneurshipsecret.com/components-of-a-good-business -succession-plan.
As difficult as the planning process can be, the goal should be a succession plan that will be in the best interests of all—or most—of the parties involved. Business interests should be put ahead of family interests, and merit should be emphasized over family position.“Family Succession Plan First Then the Succession Plan for the Family’s Business,” Family Business Experts, 2011, accessed October 8, 2011, www.family-business-experts.com/family-succession-plan.html.
In 2008, when R. Michael Johnson—Mikee to everyone who knows him—took over the pressure-treated lumber company his grandfather founded in 1952, he had a great idea: laptops for all managers and sales staff.
“‘You would have thought the world was coming apart,” says Johnson, CEO and president of Cox Industries in Orangeburg, South Carolina. One salesman—convinced that the computer would be used to track his movements outside the office—up and quit. A buyer who had been with the company for thirty-five years said he would like a fax machine but could not see why he needed a computer when he had managed just fine without one for so long.
And that was just the beginning. In an industry where some businesses still write delivery tickets by hand and tote them up on calculators, Johnson recently led the company through an ERP (enterprise resource planning) software conversion and distributed iPhones to the sales team so they can use the company’s new customer relationship management (CRM) system.
“‘Let’s just say I have spent quite a few Sunday lunches after church explaining technology acronyms to Granddad and Grandmom,” Johnson says.
The resistance to new technology quieted, however, after Johnson was able to point to market share growth of 35 percent at the $200 million business in the past year. “The numbers are starting to resonate,” he says. “Five years ago, I couldn’t even say what our market share was because we didn’t have the technology to figure it.”Karen E. Klein, “When the Third Generation Runs the Family Biz,” Bloomberg BusinessWeek, April 9, 2010, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/apr2010/sb2010049_806426.htm.
All businesses have conflict. It can be a good thing or it can be a bad thing. Positive or constructive conflictConflict that is beneficial to a family business. can be beneficial to a family business when it increases opportunity recognition, produces high-quality decisions, encourages growth, strengthens groups and individuals, increases the learning necessary for entrepreneurial behavior, and increases the levels of commitment to the decisions being made.George Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011; Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84; and Suzi Quixley, “Understanding Constructive & Destructive Conflict,” May 2008, accessed June 1, 2012, http://www.suziqconsulting.com.au/free_articles_files /CON%20-%20Constructive%20&%20Destructive%20-%20May08.pdf. An example of positive conflict is a disagreement between family members on the strategic direction of the family business, the result being a much-needed rethinking of the business plan and a new agreed-on vision for the company.“Managing Conflict in Family Businesses,” Business Link, 2010, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId= 1073792653.
By contrast, negative or destructive conflictConflict that can hurt a family business. can hurt a business by damaging the harmony and relationships of family members in the family business, discouraging learning, causing ongoing harm to groups and individuals in the business, frustrating adequate planning and rational decision making, and resulting in poor quality decisions.Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84; and Suzi Quixley, “Understanding Constructive & Destructive Conflict,” May 2008, accessed June 1, 2012, http://www.suziqconsulting.com.au/free_articles_files /CON%20-%20Constructive%20&%20Destructive%20-%20May08.pdf. “The absence of good conflict makes it that much harder to accurately evaluate business ideas and make important decisions…But conflict does not mean browbeating.”Professor Michael Roberto from Harvard Business School, quoted in George Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011. An example of a negative conflict would be arguments over the successor to the business. Ultimately, the failure to adequately control negative conflict may contribute to the high mortality rate of family-owned businesses.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262.
Because of the clash between business and emotional concerns in a family business, the potential for negative conflict can be greater than for other businesses.“Managing Conflict in Family Businesses,” Business Link, 2010, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId= 1073792653. The tension that exists among the personal lives and career pursuits of family members creates an interrole conflictA situation when a family member has simultaneous roles with conflicting expectations. (occurring when a family member has simultaneous roles with conflicting expectations) in which the role pressures from work and home are incompatible.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262. This conflict is difficult—if not impossible in some instances—to resolve. “Due to the interconnection and frequent contact among family members working in the business with those who are not but may still have an ownership stake, recurring conflict is highly probable in family firms.”Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84.
The specific causes of conflict in a family business are many. Because the typical understanding of conflict in family businesses is that conflict refers to negative conflict that is unhealthy and disruptive, negative conflict is the focus of this section.
The PricewaterhouseCoopers Family Business Survey“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf. identified a core group of issues that are likely to cause tension.
| Issue Causing Tension | Causes Some Tension (%) | Causes a Lot of Tension (%) |
|---|---|---|
| Discussion about the future strategy of the business | 25 | 9 |
| Performance of family members actively involved in the business | 19 | 8 |
| Decisions about who can and cannot work in the business | 19 | 7 |
| Failure of family members actively involved in the business to consult the wider family on key issues | 16 | 7 |
| Decisions about the reinvestment of profits in the business versus the payment of dividends | 15 | 7 |
| The setting of remuneration levels for family members actively involved in the business | 14 | 7 |
| The role in-laws should or should not play in the business | 14 | 7 |
| Decisions about who can and cannot hold shares in the business | 13 | 6 |
| Discussions about the basis on which shares in the business should be valued | 12 | 5 |
| Rejection of chosen successor by other family members | 10 | 5 |
Add to this the fact that “family firms are prone to psychodynamic effects like sibling rivalry, children’s desire to differentiate themselves from their parents, marital discord, identity conflict, and succession and inheritance problems that nonfamily businesses do not suffer from,”Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84. and it’s easy to see how the family business is a fertile field for negative conflict.Michael Harvey and Rodney E. Evans, “Family Business and Multiple Levels of Conflict,” Family Business Review 7, no. 4 (1994): 331–48, as cited in Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84.
Several other sources of conflict can occur in a family-owned business. A sampling of those sources is discussed here. All have the potential to adversely impact family relationships, business operations, and business results.
Some measure of family squabbling is expected in a family business. Some of the arguments will be logical and necessary. However, “it’s important that they remain professional and not personal, because squabbling among family members in a work environment can make the employees and customers feel extremely uncomfortable, and can give them grounds for legal claims against the business.”“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150. The negative effects of family squabbling are as follows:“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.
Avoiding conflict is no easy feat. However, there are several things that a family business should consider. First, there are consultants who engage in conflict resolution for a living. The possibilities should be checked out. If the budget can handle the costs of a consultant, it could be the best choice. A consultant, having no reason to take one side or the other, will bring the necessary objectivity to resolution of the conflict.
Second, emotional reactions should be differentiated from problem-solving reactions. Family members need to take a professional perspective rather than that of an irritated sibling, parent, son, or daughter.“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150. It will probably be difficult to do this, but it is important that it be done.
Third, focus on the professional role instead of the family role. “Make sure it’s clear what the expectations and attitudes of all your employees are…Because you’re a small business, you might not have as strict a policy as a large corporation, but it would still be helpful to put it in writing, such as in an employee handbook, which carries legal responsibilities to both family and outside employees.”“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.
Fourth, encourage honesty from the beginning. When first starting to work together, it is important that family members sit down together to talk about potential conflicts that might arise. Acknowledging that it will be more difficult to work together because of being family is a good beginning. Treating family members and the professional environment with respect and expecting honesty when someone steps over the line should make for a smoother process.“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.
Last, the founder should try to keep the conflict constructive. This means stimulating task-oriented disagreement and debate while trying to minimize interpersonal conflicts.George Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011. This will require a fair decision-making process. For people to believe that a process is fair, it means that they mustGeorge Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011.
When people think about family businesses, they usually think friendly, “quality, wholesome, and continuity.” Customers feel that they have a connection to the business because they also have a family. It is something customers feel they can trust.“Promoting Family Brand Linked to Companies’ Financial Success,” Austin Family Business Program, September 15, 2008, accessed October 8, 2011, www.familybusinessonline.org/index.php?option=com_content&view+article&id =38:promoting-family-brand-linked-to-companies-financial-success-&catid=13:latest -news&Itemid=39. Customers are reminded that there is a family behind the business, not a faceless corporate entity.Sahil Nagpal, “Family Businesses Perceived of Greater Value by Customers,” Top News, August 15, 2008, accessed June 1, 2012, http://topnews.in/family-businesses -perceived-greater-value-customers-259364. These are important sources of customer value.
The high priority that family businesses place on community involvement and the “reputational capital attributed to the family name” also translate into a perception of greater value by the customer.Sahil Nagpal, “Family Businesses Perceived of Greater Value by Customers,” Top News, August 15, 2008, accessed October 8, 2011, topnews.in/family-businesses -perceived-greater-value-customers-259364. “Family business’s identification with the family name motivates a greater emphasis on serving customers and consumers effectively, such as through providing quality products and customer services.”Justin B. Craig, Clay Dibrell, and Peter S. Davis, “Leveraging Family-Based Identity to Enhance Firm Competitiveness and Performance in Family Businesses,” Journal of Small Business Management 46, no. 3 (2008): 351–71. The emphasis of the family business on its family identity may, in fact, contribute to its competitive advantage. “It is conceivable that family businesses who promote their familiness build a reputation in the market place related to customers’ positive perception of the family.”Justin B. Craig, Clay Dibrell, and Peter S. Davis, “Leveraging Family-Based Identity to Enhance Firm Competitiveness and Performance in Family Businesses,” Journal of Small Business Management 46, no. 3 (2008): 351–71. The long-term source of value for the customers of family businesses may rest with the belief that the businesses are customer-focused.
A family business can help or hurt its cash flow depending on whether it compensates family members at market value. If a family member’s compensation is based on “family values,” such that the parents’ compensation is excessive and the children’s compensation is much less than their fair market value, this would give an inflated picture of the company’s profitability.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344. However, it will help the company’s cash flow because they will have more money to spend on the business. If, however, the children’s compensation is excessive, often based on housing and family needs of the family members as opposed to their worth to the business, this would give an unrealistically low portrayal of the profitability of the business.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344. This will hurt the company’s cash flow because the amount of money available to spend on the business will be reduced.
It is estimated that about 40 percent of US family-owned businesses survive into second generation businesses, but only about 13 percent are passed down successfully to a third generation. One of the main reasons for this is that technological change moves so swiftly that it bypasses the older generation. “Unless the next generation is poised to update, and can get buy-in from longtime employees wedded to ‘the way we always did it,’ a business can quickly become obsolete.”Karen E. Klein, “When the Third Generation Runs the Family Biz,” Bloomberg BusinessWeek, April 9, 2010, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/apr2010/sb2010049_806426.htm. It is understood that family businesses will have different technology needs depending on their size, industry, and growth objectives. For many family businesses, however, the move to greater technology integration should be seen as a natural part of business evolution.
With respect to e-business and e-commerce, the commitment of a family business to digital technology will be a necessary precursor to the integration of e-business solutions. E-business is discussed in more detail in Chapter 4 "E-Business and E-Commerce". The commitment to e-commerce should also be seen as a natural part of business evolution and a necessary response to the ubiquitous nature of the Internet. E-commerce for the small business is also discussed in greater detail in Chapter 4 "E-Business and E-Commerce".
What Happens Now?
“From the day he opened his jewelry store in 1980, Michael Genovese, 57, expected his son Joseph, now 32, to come into and eventually take over the business. Joe started working there part time while still in junior high, engraving and polishing. ‘Dad offered me a job, and I jumped at it,’ he recalls. He did repairs, made jewelry, and worked in sales. ‘He worked hard and did the dirtiest jobs’ as he learned the business from the bottom up, says Mike.”
“After graduating from college, Joe returned to the store, although Mike had urged him to first ‘get some different experience working in another job.’”
“Back in the store, Joe was soon out-selling the other salespeople. Mike also began gradually training him in management duties—i.e., buying, working with vendors, personnel duties (like hiring and firing), financial matters, and managing sales staff—as he groomed him to lead the business. ‘I never had a written [transition] plan, says Mike, ‘but in my mind I planned this from the time he was a kid working here.’”
Then disaster struck. Mike had a serious heart attack. He was incapacitated by bypass surgery and months of recovery. Everything started going haywire. Joe’s older brother, who never before had any interest, has now expressed an interest in the business. He has had several years of experience in another job and feels that it would be appropriate to come into the business at a high salary. In the meantime, the other salespeople are beginning to express dissatisfaction with their compensation and benefit plans, feeling that Joe has always received special treatment. There is a lot of dissension at the jewelry store. Joe is ready to tear his hair out. What should he do?William George Shuster, “Family Business in Crisis: Letting Go,” JCK Magazine, March 2003, accessed October 8, 2011, www.jckonline.com/article/282706-Family _Business_in_Crisis_Letting_Go.php.
