The building blocks of running a successful family business

A good family business is one that finds the right balance between its ownership power, and the logic of operating and scaling a successful business, with a sprinkle of human emotion to guide the company with its identity into the future.

Some of the world’s most successful and longest-running businesses are family businesses, but adding family dynamics to a business corporation can present its unique challenges. There are a variety of opportunities and downfalls that come with succeeding in a family business, whether as an owner or an employee.

The world’s richest family just got $11 billion riche | CNBC

The general atmosphere

A family business is a company that is legally owned by two or more family members. In other words, a family business is unlike a public company such as Apple, which is mostly owned by institutions and can be bought and sold in thousands of shares a day. With a family business, 6–10-or more siblings control the business aspirations, each with their unique characteristics. Moreover, in addition to who they are and what they want, the relationships among them matter tremendously. For example, a company where there is a lot of sibling rivalry is very different than if they get along very well.

Imagine the decisions that you may make in your own family, such as going out to dinner or choosing the movie you’re going to watch. Now imagine family business owners who need to make typically big decisions about what they want to do with their business on a daily business and align their siblings on the corporate vision and outcomes while having to stay together as a family. It’s a difficult task.

Vikram Bhalla: Family businesses are here to stay, and thrive | TED@BCG

The ‘ownership’

Ownership is a major part of our personal lives, such as when we say “I own a house, a car, etc.?” This ‘ownership’ means that ‘you’, the owner, get to make all the important decisions about that thing that you own. Everything from who can visit it to the color scheme on the walls. Whether to sell it, whom to sell it to and when. This notion of ownership is generally missing in conversations about a publicly traded company while it is quite different in a family business.

The reason is that in a public company, the owners don’t do very much other than buying low and selling high. Most of the power of ownership in a public company has already been delegated to the board and management. Business schools generally teach management around the noted definition of ownership that exists in a public company, which is quite different from that in family business because, in a family business, the owners are not the abstract institutions or people who are trading shares but real people that get into a room together and exercise all their ‘ownership’ powers to control the fate of the business.

The power structure

As the owners of a business, the family owners possess what can be called the right to design the power structure in their organization, unlike in a publicly held company. In a family business, there is the right to sort of say, “What are we going to own together? Is it just a business, a family office, or even a foundation? Who can also be an owner? Who allowed to come into the ownership or not?” In some family businesses, all of the ownership may go back to one person, while in others, every family member may be an owner and even the spouse.

The decision-making rights

The owners in a family business have the right to make decisions about what happens in the business, everything from the corporate and business strategy to paying dividends or reinvesting cash back into the business. The owners can make all decisions or delegate them to a board of directors and managers. Which makes it more complicated, amid the family dynamics outside (and even inside) the workplace.

When family businesses start, they are often a single-person-founder company who is the controlling owner, and they generally make decisions the same as they do with their kids, “we’re doing this because I said so.” But as the business grows, it becomes important to figure out the decisions that the owners should hold on to and the ones that need to be delegated. And until these decision rights are not delegated to specialized teams or individuals, the business will rarely scale.

The measurement of success

While in a publicly-held company the main objective to measure is, “what decisions will help maximize total returns to shareholders?”, in a family business, especially a privately held one, it’s much different. In a family business, the owners have the right to decide what they value in their business, and generally, in addition to financial performance, the family often cares about the family objectives such as the desire to avoid conflict, or having a big disagreement, or pursuing social objectives that they care about as much as or even more than making money. Generally, there is much more emotion involved in decisions made in a family business compared to a public company.

Things to consider when working for a family business

A misconception is that family businesses are not a great place to work, because there’s a top of a pyramid, and you will not be able to reach the highest echelons, since you don’t have the right last name. And while some of that is true, there are plenty of family businesses that have non-family members running them, and every company — public or private — has a pyramid, and only one person can reach the top at a time.

But those who manage to work for a long period in a family business find that that they like working with the owners, they are closely connected with the owners or their vision and attitudes and hence can influence processes and decisions more rapidly and powerfully. For example, if there is a big idea, there aren’t 10 layers of the chain of command and the owners can be accessed quickly.

One important factor to consider when deciding to join a family business is the nature of the conflicts among the owners, how harmful they are, and how much fake harmony exists. What is desired is to see is that family members can get together and make decisions, and you don’t want to work on family issues as a non-family employee. For this to work well, you want to see the owners understand boundaries where they can separate the business room or the management room from their family room.

The reality of family conflicts

While we tend to dramatize about family conflicts, especially in the workplace, in reality, most families are programmed to get along quite well, even if it’s done conservatively while sweeping some issues under the rug until the business becomes inoperable or ineffective, or makes the relationships unauthentic because people are tiptoeing on eggshells around each other.

In general, too much and too little conflict can cause very similar destructive impacts on both the business and the family. A functional family business needs to have the right amount of conflict (i.e. constructive conflict), and possess the skill sets to resolve issues.

The mistakes of family businesses

The inflection point for family businesses which is very different from publicly held companies is in the lack of preparation for the generational transition, where for example they are transitioning from the first to the second generation. There is a lack of a process to talk about what they want to do with their business and to involve the next generation.

Successful transition in family businesses is generally a process with multi-year staging, lasting three, five, or even 10 years. Furthermore, in addition to the CEO role, the owners need to think about all the roles in the system including the full range of owners and the many leadership positions that need to be filled. In addition to the people, the transition needs to think about the right tools and assets that need to be handed to the next generation. The transition needs to consider building the capabilities of the next generation. And finally, it’s important that the next generation, such as cousins, get together when they’re young and create lifelong bonds, getting ready to work together in the future.

Final thoughts

Ownership is hard — you won’t find a manual for it and can’t be taught in a couple of sittings. Furthermore, how do you even become a good owner? One thing that family businesses struggle with is in finding the right balance between being too in control and not delegating enough, due to the ownership power, especially as the business grows, and just totally stepping away and disconnecting.

A good family business is one that finds the right balance between its ownership power, and the logic of operating and scaling a successful business, with a sprinkle of human emotion to guide the company with its identity into the future.

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