When Working with Relatives, Plan for the Unexpected

Family members can be great assets in a business, but to make it work, you need to face some harsh realities.

Family owned businesses, when run correctly by the right family members, can be wildly successful. But when they’re dysfunctional, family businesses can be a real nightmare for everyone involved – and even destroy families and their financial well being.

There’s no question that our own flesh and blood can offer a level of loyalty, trust, commitment and vested interest in the business’ long-term success that’s not usually given by those who aren’t our family. On the flip side, things can quickly get ugly with family members who feel jealousy, resentment, entitlement, greed and other emotions that can get in the way of sound business judgment. When problems occur, the more family members involved, the worse things can get. Moreover, family businesses can also chase away great non-family talent if they are not sensitive to their needs.

While family owned businesses are the backbone of the U.S. economy, many family businesses fail or are sold before the next generation has taken the reins. I watched firsthand the third generation of two families kill a business. It could have been avoided if they had been more rational or had proper legal documents in place.

Having spent decades counseling owners of family businesses in all sorts of industries, not to mention having worked very successfully in several businesses with my own family members, including at Cassel Salpeter, I’ve pretty much seen it all. Here are a few important things I’ve learned that are critical for those who want to sustain healthy family owned businesses and healthy family relationships:

1. Plan ahead. Simply put, you have to put in place the equivalent of a “business pre-nup.” Work with qualified legal and financial advisors to develop appropriate written agreements such as shareholder or partnership agreements that include succession plans and buy-sell provisions. We all know couples that have built fabulous businesses together – only to see those businesses fall apart at tremendous financial and emotional expense when they divorce. Same goes for siblings who fight turf wars after the parent who owned the family business passes away or retires, and one sibling wants to run the business while the others want to sell or take out money. Too often, these matters end up in court because people failed to plan in advance. It’s important to have plans in place when dealing with family so everyone knows where they stand and agrees in advance to what can and cannot be done.

2. Communicate. In fact, over-communicate. Most families don’t do this very well or often enough. It becomes difficult to handle issues because the family members don’t know how to discuss their opinions, reach consensus and make decisions efficiently. So talk it out. Lack of communication is one of the main causes of litigation and failure in family businesses.

Need help? There are plenty of business psychologists and coaches who specialize in helping family businesses. Don’t wait until things go wrong to consult professionals.

Years ago, a couple contacted me for advice regarding their plans to sell their business. Although they had spent years grooming their very capable son to eventually take over the business and he was doing a great job, they decided to begin entertaining buyout offers without consulting him.

I reminded them that if they sold the business without their son’s involvement or consent, they might burn their relationship with him and his wife and never get to see their grandchildren. I recommended they discuss their plans upfront with their son, bring him into the process and, if they still wanted to sell the business, offer to sell it to him first rather than anyone else. A few weeks later, they sent me a bottle of champagne and a note that read: “Thank you. You saved our family and our business.”

3. Be picky. Recognize that not everyone is good for the business or should be in the business. Yes, even family members must understand that the “there’s always a place for you here” school of thought may not be in everyone’s best interest. Some companies are populated by next-generation members who failed in other businesses or spent the early part of their careers as aspiring athletes, artists, ormusicians before ascending to leadership positions as unprepared 40-somethings – clearly not a good business model. Finding the right positions for the right people is crucial. Not everyone is CEO material.

4. Implement safety measures. Require training and implement a screening process for new family hires and promotions. When possible, ensure that new family hires have obtained solid industry experience before they join the business. This will help ensure that only dedicated, qualified relatives join and lead the firm. I know families who “traded” their children to get experience at other businesses before the children joined their own families’ businesses.

Additionally, some family run businesses appoint independent members to the board of directors along with family members and/or a family council, which functions like a board of directors and handles the important, potentially divisive decisions. Some have lawyers develop proper succession plans for use after retirement, death or disability. Measures like these can help prevent many of the common headaches that occur when it comes time for the second or third generations to take the reins.

5. Think creatively. Many family businesses are run for decades by the same leaders, often making it difficult to implement creative solutions or necessary changes like new technologies, business models and schools of thought. Don’t let this be the case for you. Young family members may have great ideas.

Years ago, I watched a business owner successfully devise a clever escape route from a touchy family situation. One sibling had taken over the family business and grown it to unprecedented levels. Thinking they needed extra support after sales skyrocketed, they invited another sibling to assume a leadership role. They soon learned this was a big mistake, as everything this new sibling touched turned to ashes. Rather than cause more turmoil by booting out the problem child, they offered to double his salary in exchange for staying home. He wisely accepted, and the business got back on track.

Most important, don’t be afraid to say “no” or terminate problematic or unhappy family members. No matter how tricky or delicate the situation might seem, it can be in everyone’s best interest. Having done this personally, I can tell you firsthand how hard it can be. Many family businesses suffer unnecessarily because they over-extend their resources to accommodate every family member who wants a piece of the pie. By putting the right systems in place, you can minimize the potential for trouble and maximize the potential for success while retaining everyone’s priceless peace of mind.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies.