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How Mid-Market Business Lessons Apply to Family-Owned Businesses

June 28, 2016

 

Family businesses blur a lot of lines.

 

In what other setting can the lines between family issues and business issues become so easily intertwined? In what other purposefully created environment does one confront the temptation to bring work home AND bring home to work?

 

For this reason, family-owned businesses (“FOB”) face their own unique set of challenges.

 

As a consultant to hundreds of mid-market businesses and family-owned businesses, I have identified four, seemingly universal lessons that mid-market business owners consistently identify as issues they wish they would have known prior to taking the helm. I take these lessons and apply them to FOBs.

 
A recurring Mid-Market Business Lesson: One Must Assemble the Right Talent
 

The number one recurring mid-market business lesson that both family and non-family business owners face is the importance of recruiting and nurturing the right talent.

 

The strategy and tactical execution in how employees are attracted, selected, managed, developed, compensated, and engaged is often not prioritized to the same degree as other areas of a mid-market business.

 

However, in most businesses, employees represent one of the largest costs and have a dramatic effect on all business outcomes.

 

Businesses that thoughtfully and thoroughly address how to find and nurture extraordinary talent have a significant advantage over competitors who do not invest the same time and resources.

 

For family-owned businesses, assembling great talent, especially great external talent, can be a tricky proposition.

 

Bringing in an external executive can feel equivalent to losing the control the family is accustomed to and altering the business’s "family feel" or culture. The result can create a lack of transparency with the new “outsiders,” which undoubtedly sets both sides up for failure.

 

For the external talent, joining a family business can feel uncomfortable due to this same reason as well as the strong, existing family relationships. The outsider may feel excluded from "dinner-table" conversations where business decisions are made.

 

In order to maximize benefits and avoid problems when integrating external talent into the business, owners must clearly outline process, role, and authority around the external hires. Make sure these three steps are followed as part of onboarding:

 

  1. Clearly define the outside talent's role and authority

  2. Prepare both the outside talent and the family for cultural integration

  3. Promote clarity and fairness

Both parties must be clear about internal/external talent challenges. The FOB needs to understand the outsider’s valuable skills. The outsider needs to understand the importance of fitting into a unique business culture.

 
Make Strategic Communication a Priority
 

The second mid-market business lesson often repeated is the failure to strategically communicate.

 

All companies communicate constantly—both internally and externally. Unfortunately, few do it with regards to consistency of message in context of the company’s mission, values, and goals.

 

A well-executed, formal communication plan sets the foundation for the overall company culture, expectations for both internal and external communication, and is a required for successful growth.

 

In addition, family-owned businesses in particular suffer from the plague of “unwritten rules.” Rules or understandings important to the business, but often only understood within the family or inner circle, are often not explicitly outlined but still expected of external team members. A clear communications strategy, along with outlined business processes and company infrastructure (our next lesson), is necessary to make those rules visible and understood company-wide.

 

Clearly Outline Infrastructure and Business Process
 

A clearly outlined and transparent company infrastructure is crucial for successful mid-market business and FOB operations and growth.

 

Is there an underperforming family member? Does your FOB have a system or process which evaluates performance? Do you have a published decision-making chain of command that provides consistency and expectation for family members and external talent?

 

FOBs often have poor systems to evaluate and hold people strictly accountable. That is likely due to underdeveloped HR systems and company infrastructure.

 

Without formal business processes in place, effective company growth is difficult. Informality may have been acceptable in the early days of a company, however, as a family business changes hands or generations, structure is deeply important in allowing things to run well. It is especially important to ensure that the organization does not perceive that a family member’s poor performance is tolerated (let alone rewarded).

 

Address HR Issues Expediently
 

The next mid-market business lesson goes hand-in-hand with the first one—do not wait too long to remove a poorly fit employee or deal with an HR issue. This is perhaps the number one regret of all mid-market business owners—both family-owned and otherwise.

 

In most cases, the owners have known for some time that they should separate from the employee in question, but they hesitate for one reason or another. The cost of that hesitation is almost always well beyond the financial measurement of salary and benefits.

 

Poor morale around the problem employee, hidden client issues, productivity costs, and many other unmeasured costs will result from “toleration” of the wrong person for far too long.

 

When action is finally taken, it adds energy to a team who knew well that it had to happen. Even great performers who achieve great results but are a bad cultural fits tend to be a huge addition by subtraction—and the net effect is always positive for the long-term success of the organization and team.

 

For family-owned businesses, HR issues take on an entirely new level of complexity because often the troubled employee is a family member. For this reason, family businesses have been known to become the family’s default place of employment.

 

However, to run a successful business, the team should be built around the goals of the organization—not to guarantee family members jobs. The filter for the most successful family businesses for making most decisions (especially around family members) is how this will impact the best interests of the company.

 

As with all employees, family members must be able to add value. To avoid keeping an under or non-performing family member too long, FOBs need explicit, published performance indicators.

 

Succession Planning and Equity Transfer
 

Succession planning is a challenge in mid-market business organizations, but it is especially important and tricky in family businesses. Ensuring that the right people with the talent to maximize the potential of the organization is critical, and the planning to prepare family members for taking a serious role in the company needs to be thoughtful and strategic.

 

Once the family members are contributing, how equity is transferred over time—and how it is distributed to family members inside the business with different levels of contribution, as well as non-family members if that is the desire of the shareholder deciding to distribute the stock—is fraught with emotion and issues that can poison a company if not handled correctly.

 

All of these issues cry for outside help with the experience of handling them across many families and companies. Their potential impact on a business if not handled correctly can be devastating.

 

Son Rich, Grandson Poor

Certainly these FOB lessons (not to mention bringing work home and bringing home to work) may leave the impression that family, per se, serves as a barrier to success. This is an unintended impression. FOBs have numerous strengths, including: Frugality in good times and bad, a high bar for capital expenditures, and small debt loads.

 

However, it never hurts to share common lessons. If you have experienced some of them, know that you are not alone. And if you haven’t experienced them, it is always good to keep an eye on their potential development.

 

Occasionally, these lessons don’t occur until the second or third generations enter your business. In that case, these lessons may help you identify the situation, which is best described by a saying about family-owned businesses in Mexico, “Father, founder of the company, son rich, and grandson poor.”

 

Image Credit: Shutterstock

 

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