How to Meet the Challenges of Managing a Family Business

Owners of family businesses face unique challenges that nonfamily-business owners don't have to worry about. These often arise from the dynamics of family relationships and the need to transfer these into the business environment.

Family relations can sometimes get messy. When family members go to work together, it can be hard to flip a switch and pretend that problems at home don't exist. Family businesses that don't recognize these situations and confront them head-on can end up with major problems — both at work and at home.

Setting Boundaries

The first rule of managing a family business sounds simple, but it can be hard to implement: Leave family stuff at home when you walk into the office. And similarly: While at work, decisions always must be made with the best interest of the business in mind.

If you own a family business, tough choices may arise. For example, suppose you have to make a promotion decision between a family employee and a nonfamily one. The nonfamily employee is better qualified, but you know that promoting him over the family member is going to cause friction at home. For the sake of the business, though, you should promote the nonfamily employee.

It's critical to guard against even a hint of nepotism in family businesses. If nonfamily employees believe that family employees are receiving preferential treatment, this can severely damage workplace morale and possibly lead to an avalanche of employee turnover.

Preferential treatment can include salary and compensation. As a family business owner, you walk a fine line here: Family members shouldn't receive higher compensation just because of their name if their performance or responsibilities don't warrant it. On the flip side, owners sometimes go too far the other way and undercompensate family employees to avoid bad appearances.

The best solution is to pay family employees market salaries based on their performance and job responsibilities. Family members may have opportunities to participate in company ownership, but these too should be based more on their capabilities than their name or bloodlines.

The corollary to the first rule is that, for the most part, business matters should be left at the office. This isn't to say that you and your family employees should never talk about business at home, but it's important to set boundaries. For example, designate certain times and places at home for business discussions, or designate times and places when shop talk is off limits — like the dinner table.

A Family Business Constitution

One of the best ways to find the right balance between family and business is to draft a family business constitution. This is a formal document created with input from all family employees that specifies how the business will be managed from a family perspective. A family business constitution typically addresses such areas as:

Business and family balance. How will family employees determine the right balance between business and family? This balance doesn't have to be the same for every family employee; instead, they should all be encouraged to find the right balance for themselves based on their business and family responsibilities.

Business ownership. What criteria will dictate which family employees can own shares in the business? How can these shares be transferred or sold, and what are the policies governing dividend payments?

Hiring, compensation and termination. What kind of experience and education must family members possess to be hired in the family business? How will their compensation be determined? And under what circumstances can family employees be terminated?

Be Proactive

There are certainly unique challenges involved in running a family business. The best way to meet them is to be proactive and head them off before problems arise.

For additional information, please contact Nick Sarinelli, CPA/Partner on (973) 328-1825.