The future belongs to those who believe in the beauty of their dreams. -- Eleanor Roosevelt
Dreams are the foundation of most family businesses. The dream often combines success and financial security with family harmony and togetherness. Keeping the dream alive in today's economy is a challenge. Family businesses face the same challenges as any privately held business, plus they must navigate through family concerns and relationships. There are four areas that are critical to turning the dream into reality: risk, family employees, expertise and the "3 C's." In Part I, we will focus on risk and family employees. In Part II, we will look at expertise, the 3 C's and what to do when things go wrong.
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For family businesses, it is both "the best of times and the worst of times." When successful, the best of all worlds combines financial success and a close-knit family. Failure can put the entire family's financial well-being at risk.
So what can you do to reduce risk?
- Reduce debt. Debt increases both personal and business risk. Anyone who is upside-down on a mortgage understands this. Leverage is your enemy in hard times and your friend when the economy is booming. Today cash is king. Paying down debt and building creditworthiness will put you in a great position when the economy improves and you need credit to expand.
- Get good financial data. When clients bought a local bridal shop in 2006, they thought they were paying a fair price. They subsequently found that the inventory was overpriced, the accounting poorly done and the business not worth what they had paid. They have struggled as the economy deteriorated; now both the business and personal assets are at risk.
- Maintain a good accounting system. A good accounting system is one of the most boring but essential tools for any business. You can't manage what you can't measure. Knowing where you are is the first step in charting a path to where you want to go.
Family members can be a tremendous asset to the business. They typically bring a level of trust and commitment you can't hire at any price. On the other hand, they can also bring a sense of entitlement and unrealistic expectations. The question is: Do you have a hiring policy and process for family members? If so, how does it differ from the way you would hire anyone else?
Here are a few common-sense steps to take:
- Make sure the individual is fully qualified for the position her or she is being hired for. This may seem obvious, but it's routinely ignored in many family businesses. There are many qualified applicants looking for work today. Hiring the wrong person will serve no one -- not the person you hired, his or her fellow workers or the business.
- Pay the employee a salary commensurate with his or her skills and experience. Overpaying a family member sets a bad precedent. It can also create a sense of entitlement that will be difficult to overcome in good times. Underpaying can also be harmful. It can foster a feeling of being taken advantage of. The truly valuable people may be forced to look elsewhere. Those with marginal skill sets will stay. Unless it is clear that sweat equity is the buy-in to ownership, underpaying is usually a bad idea. You often get what you pay for, even with family.
- Clearly outline the job description and set expectations for behavior and performance. This will prevent misunderstandings that can undermine both the business and family dynamics.
Taking these first steps will go a long way toward protecting your investment and building a solid team to help you build the business.
Bill Sornstein and Rachel Owens are principals inSuccession Strategies Inc. They help family-owned and closely held businesses survive and thrive across several generations. Clickhere to access the free Family Business Self Assessment tool.