“Hey, Dad! Can I take the company out for a spin?”
It’s not hard to imagine a family business founder hearing those words. Nor is it difficult to feel the patriarch’s gut-wrenching reaction. He slaved for years building a successful business, creating a product, toiling to find customers, striving to beat the competition. How in the world can he entrust his life’s work to that kid who once vomited in his lap on the Dragon Coaster at Playland?
Such dilemmas and dramas are inherent in family businesses—and there are an estimated 10,000 of them in Westchester—as they pass (or not) from generation to generation. In addition to finding good employees, the family business owner has to somehow fit his or her offspring, cousins, and in-laws into the workforce. Without destroying morale. Or the business. He or she has to not only mediate customer complaints, but somehow separate siblings whose rivalry makes the Yankees-Red Sox look like a love fest. And should he fire daughter Susie’s ex-husband before or after the divorce is final? Or not at all?
“Usually, family business problems have less to do with money and more to do with the roles of family members,” says Joseph M. Pastore, Jr., business consultant and former dean of Pace University’s Lubin School of Business. “The root of most problems is the role conflict between family position and business position. It’s extremely difficult to separate the two.”
Or, as White Plains attorney Andrew Karlen, who has specialized in family business matters for most of his 35 years in practice, points out, “The business is the business and Thanksgiving dinner is Thanksgiving dinner.”
Karlen says family dynamics are almost inevitably intertwined with how the business is run. “I was meeting with a family management team once,” he recalls, “and the dad took me across the hall to show me how messy his son’s office was.” Normal business relationships become complicated when family is involved, he adds. “I may work at the family company and have ownership, while my brother may be CEO and also have ownership. We both may get dividends, but we don’t get the same salaries even though we have the same last names. That’s not fair.” Sibling rivalry, anyone?
The dynamics of managing employees are different in a family owned business, too. “Let’s face it,” Pastore says, “family members are treated differently than non-family members. Most employees feel a sense of injustice there, so you shouldn’t tell a non-family employee they better stop coming in late, for example, when a family member gets away with it.”
Such issues face a surprisingly large number of companies, although the exact number depends on how you define a “family business.” Some estimates are as high as 90 percent of all U.S. businesses, but those include every sole proprietorship in the country, many of which won’t be passed to the next generation.
Edward Rosenfeld was president of one such family business, International Furniture Rentals in Hawthorne, until it was sold to Warren Buffett’s Berkshire Hathaway. Today, he serves as a consultant to other family owned businesses and has seen plenty of role confusion in them. “If there are other family members in the business, their relationships with the founder are fraught with emotion. The founder may not always be aware of when he or she is functioning as father or mother, boss, or investor.” He adds, “They are often fearful of conflict and so are frozen in inertia or are caught in a conflict that is destructive to the business.”
Given all this sturm und drang, how can family businesses survive from one generation to the next?
Many don’t. The Family Firm Institute estimates that only 30 percent of U.S. family ï¬rms survive the shift to the second generation, only 12 percent are still viable in the third generation, and only 3 percent make it to the fourth generation or beyond. Of course, not all of the firms actually fail; many are sold to buyers outside the family or simply stop operating because they were sole proprietorships whose owners don’t have heirs. Still, family businesses face some unique issues.
In a 2010 survey by PricewaterhouseCoopers, 44 percent of family business owners said they’d quarreled about the future direction of the business, and 36 percent said that they had argued about the performance of family members employed in the company. Every consultant interviewed for this story recommended that the company form an advisory board to provide advice and outside perspective. “It’s important to have people who are respected and bring skills to the table,” Karlen says. “The company lawyers and accountants are paid advisors anyway, so they really shouldn’t be on that board. People in similar non-competing companies, retired business people, or even people with connections might be very valuable.”
Then there is the question of hiring family members. “Is every member of the family automatically entitled to work at the company?” Karlen asks. “That may not be a good idea.” Companies should require family members to have a college education—if that’s a criterion—and outside work experience before they join the business, according to Karlen. That, he says, not only improves the quality of their work but gives them a better sense of accomplishment and self-worth. He adds, “It’s also a good idea to have them report to someone other than their own father.”
As Rosenfeld explains, “Any business has to be able to recruit and retain good employees. You have to recruit a family member into the business with open eyes.” After all, “One of the advantages of being an entrepreneur is creating a nice situation for your children, but if that’s the only criterion for hiring a family member, the other employees won’t respect that person.” In addition to an advisory board, he recommends a mentoring system, where a non-family employee works with the new hire to ensure equitable treatment. “The family member shouldn’t be at the whim and mercy of their parent,” he says.
“The message to the family has to be that they have no special privileges,” Pastore adds. “The non-family employees have to know they have the same rights and obligations. You want to narrow the differences between family and non-family to an acceptable and practical level.”
Succession is the biggest question of all, of course. “There’s always the issue of whether Dad or Mom are ready to let go. And if they are, do they really let go?” says Karlen. “I once heard the business consultant Edward Monte say that you can’t just appoint a successor, you have to anoint one. The employees have to know who is really in charge and making the decisions.”
But who gets the big job? The oldest son? The hardest-working daughter? “Siblings and cousins can vie for the leadership role,” Karlen says. “Honesty and openness are critical. Having independent board members can also take some of the burden off the owner. A child may not be qualified to be CEO, but could be great in some other capacity, like marketing or sales.”
Pastore offers a philosophical overview of family business dynamics: “You start out by being nice to one another, but there may come a time when there’s some push back, so you have to have the strength to stand up to it. The most important thing is a commitment to a long-term relationship from both the business standpoint and the family.”
In the end, he adds, “Sometimes you have to make a choice between family and business. Would you really sacrifice your family to keep the business?”
Dave Donelson’s experience as former president of a family company not only helped him write this story, but heavily influenced his series of business books, The Dynamic Manager’s Guides and Handbooks.