How many times have we read about a couple forming a garage business which eventually grew into a multi-national enterprise? Ok, not all that often, but it does happen. See Uline, for example.[i] Yet the “family business” is a more than just another euphemism for the Mob. Family businesses abound and are often created specifically so families can work together. It is a good business model. Yet, like all business models, it is not immune to failure. This blog is about how to avoid a few common pitfalls which are unique to the family business.
- Don’t Hire the Weakest Link
A few years ago, the second generation owner of a successful construction company told me how he got started. Rather than just handing him the keys to the executive suite, his dad said (in essence): “If you want to work here, go out and get a job somewhere else, even with one of our competitors. If you perform well there, we might think about hiring you here, but even then, it is not guaranteed.” This approach makes perfect sense for more reasons than a 1000 word blog can enumerate. So let me list just three: a) someone else pays for Jr’s training; b) if Jr is any good, he will be worth hiring back, and c) if Jr is less than any good, he will have somewhere else to be than inside your company ruining it. Put Jr to the test before hiring him or her.
- Avoid The Golden Boy/Girl Complex
Growing up, my friend’s family owned a regional business. This #1 son, who was my age, had a guaranteed job at the firm whenever he wanted; during high school, he used that guarantee, doing an entry-level job just like any other unskilled worker. When he messed up, he was chastised just like any other worker. Since his name was literally the owner’s name plus “Jr”, everyone knew who he was and who his father was. But, he was treated like any other worker at his seniority and skill level. There was no golden boy complex at that company. If Jr got a promotion, he had earned it and everyone knew he had earned it. Avoid rewarding your son or daughter just because they’re kin.
- But I Don’t Want To …
Most family businesses grow because long, hard hours are put in. Hard, smart work are the buzzwords of every small business owner. Unfortunately, the next generation may not have the same work ethic, at least, not when it comes to the family business. They may actually hate it: from resenting having to work for free as kids to believing mom and dad loved the business more than them. Whatever the reason, if the next generation does not show the required work ethic, revert to #1, above: don’t hire. A strong attitude is often more important than a competent aptitude.
- Not A Chip Off the Ole Block
The aphorism “shirt-sleeves to shirt-sleeves in three generations” did not come from thin air. There are too many examples of the first generation building up something from nothing, the second generation maintaining but not growing the business and the third generation frittering it all away. There are many reasons for this bell shaped curved from rags to riches and back again, but one key element is the unwillingness of the present generation to accurately size up the next generation. It is better to sell the company for a handsome profit, place the proceeds into a spend-thrift trust and protect the family legatees than entrust a viable business enterprise to someone either not interested or incapable in running it. If the next generation is not willing or able, don’t fight it: instead, sell it.
- The Wheels On The Bus Go Round and Round
Small businesses can be tremendously loyalty to their employees, family members and non-family members alike. There is nothing wrong with loyalty. In fact, all things considered, our competitive US economy is entirely too disloyal, especially in large cosmopolitan firms. That said, small businesses can suffer from the opposite error, too much loyalty, especially with family members or quasi-family members (people who have been there from the beginning or for a very long time). More than once, a business owner has said to me, “I can’t let Hank or Sally go, they have been here for 15 years.” Granted, too little loyalty and your company will never develop the trust and cohesion needed to be successful; in contrast, too much loyalty and a firm can stagnant. It is a delicate balancing act. Sunk costs and years worked are just that: sunk. If an employee is not pulling weight or is not key to the future, even a family member, you may want to think about who should be on the bus, as Jim Collins would say.[ii]
- It’s Alive
Is it ok to grow your business to a specific size, and then maintain or coast from there on? Of course. For example, you could say that, at $ 5 million per year in revenue, provided the EBITDA and cash flow is adequate, enough is enough. While this strategy is ok, it is not a great strategy. As a general rule, it is too risky and I usually recommend against it. Entropy can more easily catch the sleeping company than the growing one. Like all living things, a business is either growing or dying, strengthening or weakening. Like plants and animals, businesses thrive when energy is put in. If less energy is put in because you are coasting, less thriving is pulled out. Never stop growing.
Brett R. Keenan is a Business Coach and Retained CFO/General Counsel for Small Businesses. Based in Chicago IL, BRKeenan & Associates has helped numerous large and small companies with Finance, Law, Operations and Strategy since 1999.
©BRKeenan & Associates, LLC. 2014
[ii] See “Good to Great”, Jim Collins, HarpersCollins Publishers, Inc. (2001).