The Dos and Don’ts of Running an Efficient Family Business

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Family businesses: they seem to work really well or fail miserably.  That’s not to say that family-run businesses can’t be highly rewarding and lucrative.  However, if you’re participating in a family business, it’s important that you understand what you’re up against.  Working with relatives can be tricky unless you have a game plan—a series of rules to live by in order to achieve maximum success.  Here we provide you with six Dos and Don’ts in running an efficient family business:

1. DO create a hierarchy. In an Entrepreneur.com article entitled “Don’t Let Family Drama Derail Your Business,” author Karin Price Mueller gives this tip to ensure that family businesses have a clear chain of command and well-defined job descriptions for each employee.  She quotes David Levi, managing director of a professional services company, explaining the importance of this step: “It is critical for all parties, family and nonfamily, to know that Dad may be in charge of the family, but the sister is in charge of sales at the office.”

Without this clear hierarchy, family and nonfamily employees will not know who they report too, and productivity will be compromised considerably as a result.

2. DON’T create alliances among family members. This factor often contributes to the failure of family-run businesses.  When members of a family business begin keeping secrets from certain factions, creating alliances and excluding individuals from crucial business decisions, a division results that can destroy a company.

3. DO communicate. It’s no accident that this tip follows the one discouraging family alliances.  In order to avoid poor business etiquette that can seep into family-run organizations, it’s important to have open lines of communication.  As with any business, you should have regular managerial and staff meetings to ensure that everyone is on the same page.  Also, create email groups so that business correspondence is sure to travel to all vested parties.

4. DON’T hire unqualified relatives. Family-run businesses can become the island of misfit employees if you’re not careful.  They are often the go-to business when Cousin Joe is down on his luck again, and your relatives believe you certainly have something that can keep him busy and employed.  Don’t get caught in that trap!  Just like any other viable business, you must hire qualified and trustworthy employees.  Hard as it may be, you shouldn’t lower your expectations in order to hire relatives.

5. DO have a succession plan. You may think you or your father or your great uncle Richard will run the company indefinitely, but the truth is, situations and circumstances change, and a company will be more likely to survive those changes if a succession plan is firmly in place.  Mueller suggests hiring an estate planning attorney to create this plan and organize all necessary documents.

6. DON’T create arbitrary compensation plans. Employees should be paid according to their expertise and overall company contribution.  If Cousin Joe, the guy who’s down on his luck, begins making more than a long-term employee with considerable expertise and experience, one could argue that this relative is receiving preferential treatment.  Don’t put yourself in such a precarious legal and ethical position.  Create a compensation chart, with the help of a professional if  necessary, and follow it strictly.

Family businesses can be lucrative and fulfilling ventures, but only when handled properly.  Take the necessary precautions to ensure that your family business is in the best position to succeed, with all those involved.

Join the Discussion

When it comes to topics like this one, it can be difficult to find a group of small business owners with whom you can ask questions, share insights, and offer advice.  Luckily there are online discussions groups, listservs and forums to help you connect with these individuals.  Universal Accounting Center has developed a forum for financial professionals to provide just that community environment for which you may have been searching.  Please join us and make our community stronger, and to “talk” about issues that matter to you.  Members are free to ask questions, provide resources and take advantage of the resources others may offer.  Join us today!

Resources

David, John.  “Governing the Family-Run Business.” 4 September 2001  Harvard Business School: Working Knowledge Online

Mueller, Karin Price.  “Don’t Let Family Drama Derail Your Business: 5 Must-Dos for Minimizing Conflict in a Family-Run Business.” 20 May 2010  Entrepreneur.com

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