Family Ties Don't Have To Tie Your Business in Knots

A family business not only can be a successful venture, but also may serve to strengthen family ties and leave a legacy of accomplishment and financial security for future generations. Sometimes, however, a fine balancing act must be maintained when it comes to treating participating family members equally and fairly. There can be pitfalls along the way, but anticipating the "what ifs" can help maintain harmonious family relationships and contribute to a prosperous, ongoing business.

Some "What Ifs" Needing Delicate Treatment
A founder has two sons who have been doing a good job working for Dad, who is nearing retirement. Both children are successful in their respective jobs and instrumental in the overall success of the business. Now the father must decide which son takes over, without causing resentment and future problems between them. Several options may work, but he must address the issue of succession well in advance of his retirement date. A simple but sometimes avoided option is to ask both children how they see the business being divided. Can they split the authority, areas of responsibility and duties so as to become fair and equal partners?

This option has worked in a number of actual life situations, particularly where two siblings have been working amicably under a parent's leadership in previous years. Titles? One can be CEO, the other president. This may be important, not necessarily for personal egos, but to help make employees comfortable with the new setup. Such an arrangement can work even better than with the authority of a single person directing the business. Often the perspective of another individual with equal authority can bring a synergy to a business operation that had not existed before.

Splitting Profits Without Splitting the Family
Fairness to family members can become a thorny issue when deciding on the sharing of earnings. Family business owners often give shares of the business to family members who are not active in the business. Complications can arise when these stockholders want a say in how the company divides profits. An active participant in the operation may feel it more desirable to throw profits back into the business for growth purposes, while passive stockholders may note that profits are being declared but not distributed.

There Is a Solution
Consultants advise that a clear sense of the family's mission for the business can head off such problems. Keeping family shareholders advised of the expenditures, operations and aspirations of the business should be a regular objective. Let's say that a stockholder sees all the advantages of re-investing profits but still wants or needs some money. A formal stock redemption plan, especially where there are a number of family stockholders, is a practical idea. Have the company offer to redeem stock, up to an annually set number of shares at a price designated by a formula. Stockholders may also be allowed to sell shares to other family members.

When Retirement Is Postponed
An owner's son is recruited into the business and promised the reins of leadership. A 10-year projected retirement date is postponed. The potential heir notes that his peers are advancing in business, but for him it is not happening. He's tired of being told to wait, so he quits. His family feels he is too impatient and that he is acting rashly. He feels the postponement is a betrayal.

Developing a plan for progression may have helped in this case. Agreeing on mutual goals and honoring that agreement could help the son learn the business and slowly take over so the parent feels secure about retiring.

Outside Advisors Solve Many Fairness Problems
Bringing in an outside consultant to handle a special family problem each time one arises can be costly and divisive. Why not have ongoing consultant services in the form of an outside board of directors? A close family-held operation may have some qualms about bringing outsiders in no matter how good the intentions. However, a successful business may grow so rapidly that existing family members do not have the expertise needed to confront more complicated business conditions or to take advantage of expanded opportunities.

An outside board may be the answer, providing not only business expertise, but an objective viewpoint on the family business. "Who are they to tell us how to run our shop?" some family members may say. You can always opt for a "toe in the water" approach and add a single director for a limited time. If it works out, there is a precedent for adding others.

An added element of synergy and an objective look at business operations has often been the result of such an arrangement. In fact, some companies have discovered that a talented and trustworthy outside board can be one of the best things that can happen to a family business. The board may be able to handle fairness questions with an objectivity that may be beyond the capabilities of family members.

Keep Your Options Open
Family businesses stay around generation after generation not just for the profits, but for the deeper experience of family members being connected to each other. Sometimes those connections can become unraveled, and no matter how slowly, can damage family relationships as well as the business. To insure that your business will stay in your family for generations to come, make sure all family members remain willing and communicative. Discuss all issues openly, and when push comes to shove, bring in outside advisors who can take an objective view as to the problems you are experiencing. Don't let anyone tie your family relationships and business in knots.