The Reality of Running a Business With Friends and Family PLUS Important Advice

Updated on 19 May 2019

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It’s been reported that family-run businesses generate 50% of GDP and are responsible for 70% of employment creation in the USA.

While there aren’t any up-to-date stats from South Africa to compare to, there are numerous examples of family-owned businesses that have become steadfast contributors to the local economy, including the likes of Pick n Pay, Altron, De Beers, and Remgro to name a few.

While trust, commitment and common values are just some of the positive pillars that a family-run business model is built on, there are also common challenges that tend to get in way of its success.

Here is advice for owners of family-run businesses to safeguard its future growth, longevity, and to cultivate a fair and healthy culture.

1. Treat family members the same as any other staff member

Favouritism towards family members in the workplace will cause issues amongst the rest of the staff, creating an unfair environment that fuels resentment. Business owners can manage this by implementing standard performance measurement systems, and by setting a clear span of authority of decision making. Furthermore, in order to overcome some of this limitation, leaders should, if at all possible, try get family members to report to non-family members in the business.

The second generation should never be gifted a business

2. Be transparent about the succession plan

By far, the most contentious issues in family-run businesses, is the succession plan. The worst thing is to keep the family and employees in the dark, therefore owners need to be open and honest about the succession plan from the start.

What’s more, the successor needs to understand the pre-conditions for taking over, have clarity about what they have to achieve in order to ‘qualify’ for this role, and consistently develop their own career growth. It’s often a valuable practice to host regular family board meetings, outside of the company board of directors. This allows the family members to discuss and agree on the planned approach, i.e., the role of the family, and the successor career development, etc.

3. Get external legal and tax advice

It’s vital to ensure that family-run businesses get external legal and tax advice. This outside, objective input facilitates the appropriate structures within the business to aid sustainable growth. This should be put in place as soon as possible to create continuity, and protection etc.

4. Balance the board of directors

The board of directors should include a balance of family and non-family members. When set up properly and fairly, the external balance of thinking and testing will safeguard the future growth of the business through objective and calculated voting and structure.

5. Never gift the business

The second generation should never be gifted a business. This should be a formal business decision, i.e., the business should be sold to the next generation who want to take it over. Without this value, it could easily be taken for granted. In fact, it’s been reported that only a small minority of highly successful family-run businesses have thrived through several generations, as many struggle to survive to the second and third generation.

6. Successor prospects should ‘do their time’

Before taking over or moving into a senior executive role in the family business, family members should be encouraged to work in another corporation first. This individual should spend at least three to five years working in another organisation to gain exposure to alternative thinking, different internal culture and develop a richness of insight.

7. Never create a job for a family member

Family members should only be appointed to a vacant role in the business, for which they need to qualify. They should certainly not just walk into it. Through proper financial planning, a company will clearly see what they can afford in terms of resources, and since employees are the biggest cost to a business, owners should always consider the organogram and respective cost structures.

Conversations about the business tend to crossover into family time and so it becomes all important to be strict about ‘switching off’

8. Offer fair remuneration based on the sweat ratio

In some instances, family members are part of the business because they inherited it, or are part of a trust. And as such, remuneration should be scaled according to the amount of blood, sweat and tears put into actively running the business.

9. Warning – working together can cause marital strain

Husband and wife teams running a business sounds more glamorous than it is. Realistically, it’s not for everyone. The biggest challenges in this dynamic are related to boundaries, roles, expectations and balance.

Working together can become all consuming – conversations about the business tend to crossover into family time and so it becomes all important to be strict about ‘switching off’, i.e., no business discussions after 6pm at the dining room table.

Moreover, the role each individual plays in the business, together with what is expected compared to what is delivered, often creates tension. This strain on the relationship can be testing, if not destructive.

Finally, when both the husband and wife work together, it can be difficult for them to take time off together. Unless a strong, senior ‘backup’ team is in place to manage the business while they take time away from the office, this can be a major challenge.

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