Chapter 3 Family Businesses

Market and Employment Presence

Because of the private nature of most family businesses, it is difficult to obtain accurate information about them.Joseph H. Astrachan and Shanker, “Family business’s Contribution to the U.S. Economy: A Closer Look,” Family Business Review 16, no. 3 (2003): 211–19. Complicating the situation is that most data sources do not distinguish between small family businesses, such as the local pizza parlor or deli, and large family businesses, such as Walmart, Mars, and Ford. “The reality is that family-based operations are represented across the full spectrum of American companies, from small businesses to large corporations.”“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm. Within this context, the following has been observed:“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm; and Stacy Perman, “Taking the Pulse of Family Business,” February 13, 2006, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/feb2006/sb20060210_476491.htm.

• Family businesses account for a staggering 50 percent of the gross domestic product (GDP).
• Although it may seem that this GDP contribution comes from thousands of small operations, 35 percent of the Fortune 500 companies are family companies.
• Family businesses account for 60 percent of US employment and 78 percent of the new jobs created.
• Family businesses represent one of the fastest growing sectors of the economy because their new job requirements outpace their current employment rates when compared to other types of businesses.

What this means is that family businesses continue to be a powerful economic force, no matter what their size and no matter how they are defined. “Family firms are the most common form of business structure; they employ many millions of people; and they generate a considerable amount of the world’s wealth.”“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf.

The focus of this chapter is on the small family business.

Advantages and Disadvantages of the Family Business

There are benefits to a family business, but there are disadvantages that must be considered as well. Starting a family business is not for everyone.

Communication

Communication is important in any business, but the complexities of communication in a family business are particularly problematic. Experts say that communication is one of the most difficult parts of running a family business.Christine Lagorio, “How to Run a Family Business,” Inc., March 5, 2010, accessed October 8, 2011, www.inc.com/guides/running-family-business.html. The approach to communication needs to include commitment, the avoidance of secrecy, and an understanding of the risks of bad communication.

Commitment

In a family business, it is critical that there be a commitment to communicate effectively with family and nonfamily members of the business. “Business leaders should be open about their awareness of the potential for communication issues to evolve and their willingness to accept feedback and input from all employees about opportunities for improvement and areas of concern.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed June 1, 2012, http://smallbusiness.chron.com/family-owned -business-communication-3165.html.

One important issue is whether there should be a line drawn between family and business discussions. Some suggest that setting up strict guidelines from the start that draw a clear line between the different types of discussions is a good approach.Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html. By contrast, the Praxity Family Business Survey“The Family Business Survey 2008/2009,” Praxity, 2009, accessed October 8, 2011, http://praxityprod.awecomm.com/News/2009/Pages/UKFamilyBusinessSurvey.aspx. found that it is considered OK to talk about the business anywhere and at any time, whether at work or at home:

• Nineteen percent of the family businesses in the survey reported talking about business at home.
• Thirty-seven percent talk about it in the workplace.
• Forty-four percent talk about it when and wherever.

Secrecy

In family businesses, it is particularly important not to convey the impression that family members are more in the know than other employees. “…Even when this is not the case, the potential for the perception of exclusivity may exist. Steps should be taken to address any issues that may arise openly, honestly, and without preference for family members.”Leigh Richards, “Family Owned Business and Communication,” Chron.com, 2010, accessed October 8, 2011, smallbusiness.chron.com/family-owned-business -communication-3165.html.

Risks of Bad Communication

If good communication channels are not in place, the following can occur:

• “Family members assume they know what other family members feel or want.”
• “Personal ties inhibit honest opinions being expressed.”
• “The head of the family may automatically assume control of the business even if they don’t have the best business skills.”
• “One family member ends up dominating the business.”
• “Family-member shareholders not active in the business fail to understand the objectives of those who are active and vice versa.”
• “Personal resentments become business resentments and vice versa.”“Communication and Family Businesses,” Business Link, 2010, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId= 1073792652.

These difficulties can be overcome if the family business makes a concerted effort to create and maintain an environment of open communication where people feel comfortable voicing opinions and concerns. It is important that family and nonfamily members have an equal opportunity to express their views.

Employing Family and Nonfamily Members

It is natural for a family business to employ family members, especially in management positions. Family members tend to be the first people hired when a small business gets started, and as the business grows, so do their roles.Philip Keefe, “Hiring Family Members for the Family Business,” March 30, 2010, accessed October 8, 2011, philip-keeffe.suite101.com/hiring-family-members-for-the -family-business-a220028. There are both pros and cons to hiring family members. Both need to be considered carefully. Who to hire may well be the biggest management challenge that a family business owner faces.

Professional Management

The decision to hire a professional managerAn external, nonfamily, nonowner manager. is likely one of the most important and difficult hiring decisions that a family business owner will have to make. The typical definition of professional managers equates them with external, nonfamily, nonowner managers, thus declaring professional management and family management as mutually exclusive.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. “A typical argument…is that professional nonfamily managers should be brought in to provide ‘objectivity’ and ‘rationality’ to the family firm.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.

There are several problems with this way of thinking. First, it perpetuates the outdated notion that family members are not professional, that the smartest thing for a family business to do is to bring in professional management—as quickly as possible.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.

Second, professional managers are not always prepared to deal with the special nature of family-owned businesses. “The influence of families on businesses they own and manage is often invisible to management theorists and business schools. The core topics of management education—organizational behavior, strategy, finance, marketing, production, and accounting—are taught without differentiating between family and nonfamily businesses.”Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business (Cambridge, MA: Owner Managed Business Institute, Harvard Business School Press, 1997), 4. This does an injustice to the unique workings of a family-owned business.

Third, a professional manager from the outside is not always prepared, perhaps not even most of the time, to deal with the special nature of family companies. The dominant view on professional management downplays the importance of the social and the cultural context. “This is a problem in family firms where family relations, norms, and values are crucial to the workings and development of the business.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69. It is argued that the meaning business families attach to their businesses is guided by family values and expectations—so much so that “anything or anyone that interrupts this fragility could send the business into chaos.”Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.

The hiring of an outside manager, therefore, should include an assessment of both formal competenceFormal education, training, and experience outside the family business. and cultural competenceAn understanding of the culture of a specific firm.. Formal competence refers to formal education, training, and experience outside the family business. Although it is certainly helpful and appropriate, formal competence is not sufficient for managerial effectiveness. It needs to be supplemented with cultural competence, an understanding of the culture of a specific firm. Interestingly, most family businesses look only to formal competence when selecting a CEO.Annika Hall and Mattias Nordqvist, “Professional Management in Family Businesses: Toward an Extended Understanding,” Family Business Review 21, no. 1 (2008): 51–69.

One concern of family businesses may be that the hiring of a nonfamily manager will result in the loss of their “familiness.” However, one study found that, even with nonfamily managers bringing nonfamily management activities, styles, and characteristics, “the special and unique aspects and forces of the system of the family, its individual family members, and the business itself provide a synergistic force that offsets the outside influences of the [nonfamily managers].”Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209. This same study acknowledged, however, that their research did not focus on understanding at what point, or percentage of nonfamily members, the feeling of “familiness” will begin to erode.Matthew C. Sonfield and Robert N. Lussier, “Family-Member and Non-family-Member Managers in Family Businesses,” Journal of Small Business and Enterprise Development 16, no. 2 (2009): 196–209.

Employment Qualifications

One of the more difficult challenges that a family business must face is determining employment qualifications for employees, both family and nonfamily. The lack of a clear employment policy and process can lead to major conflicts in the company. Unfortunately, it would appear that, despite their benefit, most family businesses have a family employment policy.“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf. As a result, many family businesses may end up with more employees from the family than the company needs, and some of these people may not even be qualified or suitable for the jobs they have been given. “Some family businesses even find themselves acquiring businesses that have no relationship with their original business or keeping some unprofitable business lines just to make sure that everybody in the family gets a job within the company.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1 -SABIS%C2%AE-. This kind of situation benefits no one.

A written family-business employment policy can solve a myriad of problems because it spells out the specific terms for family and nonfamily members with respect to recruiting, hiring, promoting, compensating, and terminating. One recommendation is that an ideal family employment policy should include the following:“GARBAGE IN—GARBAGE OUT: Family Employment Policies,” ReGENERATION Partners, May 2002, accessed October 8, 2011, www.regeneration-partners.com/artman/uploads/20-2002-may-news.pdf.

• “Explain the family employment policy’s purpose and philosophy.”
• “Describe how family members will apply and be considered for positions.”
• “Cover the general conditions of employment, including compensation and supervision.”
• “Outline the approach to be taken in developing and promoting family business members.”
• Make clear that family members will be completing the same applications that other candidates will complete.
• Include an inspiring and upbeat reminder that the policy’s purpose is to help the family business succeed and to support, develop, and motivate family members to lead successful and productive lives.
• Have all family business owners sign the policy, indicating they have read and agreed to it.

Others have recommended “that family members meet three qualifications before they are allowed to join the family business on a permanent basis: an appropriate educational background; three to five years’ outside work experience; and an open, existing position in the firm that matches their background.”Craig E. Aronoff and John L. Ward, Family Business Succession: The Final Test of Greatness (Marietta, GA: Business Owner Resources, 1992), as cited in “Nepotism,” Reference for Business.com, 2010, accessed October 8, 2011, www.referenceforbusiness.com/small/Mail-Op/Nepotism.html.

There are no rules that dictate the content of a family business employment policy, so differences from one family business to another can be expected. However, it is very important “to set employment conditions that do not discriminate against or favor family members. This would help establish an atmosphere of fairness and motivation for all employees of the family business.”“Family Member Employment Policies (Case Study 1: SABIS),” IFC Corporate Governance, 2006, accessed October 8, 2011, www.smetoolkit.org/smetoolkit/en/content/en/6742/Family-Member-Employment-Policies-Case-Study-1-SABIS%C2% AE-.

The benefits of an employment policy notwithstanding, the idea may be met with resistance. There may be the feeling that hiring decisions for family members should be separate from the hiring decisions for nonfamily members because being a family member provides special qualifications that cannot be matched by someone outside the family. How to proceed will ultimately fall on the shoulders of the family business owner.

Salaries and Compensation

As difficult as hiring decisions may be for the family business, decisions about salaries and compensation are probably even worse. No matter how well intentioned and well designed the company’s compensation plan may be, there will still be jealousies, hard feelings, severed sibling relationships, and even lawsuits, particularly among those family members who feel they have been treated unfairly.“Family Owned Businesses: Compensation in Family Businesses,” Gaebler.com Resources for Entrepreneurs, 2010, accessed October 8, 2011, www.gaebler.com/Compensation-in-Family-Businesses.htm. This presents a daunting challenge: how to develop a compensation plan that will be fair to family members and good for the business:

Succession

Another important issue that is particularly difficult for family businesses is succession. As mentioned earlier in this chapter, succession is about passing the business to the next generation. Decisions have to be made about who will take over the leadership and/or ownership of the company when the current generation dies or retires.“Family Owned Businesses Law and Legal Definition,” USLegal.com, 2010, accessed October 8, 2011, definitions.uslegal.com/f/family-owned-businesses. Interestingly, “only a third of all family businesses successfully make the transition to the second generation largely because succeeding generations either aren’t interested in running the business or make drastic changes when they take the helm.”“Family Business Statistics,” Gaebler.com: Resources for Entrepreneurs, October 10, 2010, accessed October 8, 2011, www.gaebler.com/Family-Business-Statistics.htm. There are family businesses that manage the transition across generations quite easily because the succession process chooses only the children willing and able to join and work with the prevailing family, business values, and goals. Unfortunately, there are also instances in which children have had to leave school as soon as legally allowed, not equipped to manage either the business, their lives, or their family. These children spend many resentful years in the business until it fails.Sue Birley, “Attitudes of Owner-Managers’ Children Towards Family and Business Issues,” Entrepreneurship Theory and Practice, Spring 2002, 5–19.

Passing the family business to the next generation is a difficult thing to do, but succession is a matter of some urgency because 40 percent of US businesses are facing the issue of succession at any given point in time.Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf. This urgency notwithstanding, there are several forces that act against succession planning:Ivan Lansberg, “The Succession Conspiracy,” Family Business Review 1 (1981): 119–44, as cited in Nancy Bowman-Upton, “Transferring Management in the Family-Owned Business,” Small Business Administration, 1991, accessed October 8, 2011, www.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp _exit.pdf.

1. Founder

   • Fear of death
   • Reluctance to let go of power and control
   • Personal loss of identity
   • Fear of losing work activity
   • Feelings of jealousy and rivalry toward successor

2. Family

   • Founder’s spouse’s reluctance to let go of role in firm
   • Norms against discussing family’s future beyond lifetime of parents
   • Norms against favoring siblings
   • Fear of parental death

3. Employees

   • Reluctance to let go of personal relationship with founder
   • Fears of differentiating among key managers
   • Reluctance to establish formal controls
   • Fear of change

4. Environmental

   • Founder’s colleagues and friends continue to work
   • Dependence of clients on founder
   • Cultural values that discourage succession planning

These are powerful forces working against succession planning, but they need to be overcome for the good of the founder, the family, and the business. It will be tricky to balance the needs of all three and fold them into a good succession plan.

The Succession Plan

Voyageur Transportation, a company in London, calls its successful succession planning program, “If you got hit by a beer truck, what would happen to your department?”“Sample Succession Planning Policy,” accessed October 8, 2011, www.experienceworks.ca/pdf/successionpolicy.pdf. As a family business owner, you should pose this question in terms of yourself and your business. Hopefully, this will provide the impetus you need to develop a succession plan.

A good succession plan will recognize and accept people’s differences, not assume that the next generation wants the business; determine if heirs even have enough experience to run the business; consider fairness; and think and act like a business. The plan should also include a timetable of the transition stages, from the identification of a successor to the staged and then full transfer of responsibilities, and a contingency plan in case the unforeseen should happen, such as the departure or death of the intended successor or the intended successor declining the role.“Family-Run Businesses: Succession Planning in Family Businesses,” Business Link, accessed October 8, 2011, www.businesslink.gov.uk/bdotg/action/detail?type =RESOURCES&itemId=1074446767. It would also be helpful to get some good professional advice—from company advisors who have expertise in the industry as well as other family-run businesses.“Avoid Feuds When Handing Down the Family Business,” 2010, AllBusiness.com, 2010, accessed October 8, 2011, www.allbusiness.com/buying-exiting-businesses/exiting-a-business/2975479-1.html.

Although each succession plan will be different, the following components should be seen as necessary for a good succession plan:“Components of a Good Business Succession Plan,” April 18, 2011, accessed October 8, 2011, www.entrepreneurshipsecret.com/components-of-a-good-business -succession-plan.

1. Establish goals and objectives. As the family business owner, you must establish your personal goals and vision for the business and your future role in its operation. You should include your retirement goals, family member goals, goals of other stakeholders (e.g., partners, shareholders, and employees), and goals relating to what should happen in the case of your illness, death, or disability.
2. Family involvement in the decision-making process. If the family and stakeholders who are involved in the decision-making process are kept informed of the decisions being made, many of the problems related to inheritance, management, and ownership issues will be alleviated. Communication, the process for handling family change and disputes, the family vision for the business, and the relationship between the family and the business should be addressed. The surest path to family discord is developing the succession plan on your own and then announcing it.Susan Ward, “Six Business Succession Planning Tips,” About.com, 2011, accessed October 8, 2011, sbinfocanada.about.com/cs/buysellabiz/a/succession1_2.htm.
3. Identify successor(s). This section of the plan will address the issue of who takes over ownership and management of the business. Identification of the potential successor(s), training of the successor(s), building support for the successor(s), and teaching the successor(s) to build vision for the business are included here. Working with your successor(s) for a year or two before you hand over the business will increase the chances for success.Susan Ward, “Six Business Succession Planning Tips,” About.com, 2011, accessed October 8, 2011, sbinfocanada.about.com/cs/buysellabiz/a/succession1_2.htm.
4. Estate planning. Estate planning is important if you are planning to retire or want to take precautionary measures regarding the future of the business in the event you are unable to continue operation of the family business due to illness, disability, or death. You should consult a lawyer, an accountant, a financial/estate planner, and a life insurance representative so that your benefits will be maximized. You will need to consider taxation, retirement income, provisions for other family members, and active/nonactive family members.
5. Contingency planning. Contingency planning is about unforeseen circumstances. It is about strategizing for the most likely “what if” scenarios (e.g., your death or disability). By thinking in terms of the unforeseen, you will be taking a proactive rather than reactive approach.
6. Company structure and transfer methods. This section of the succession plan involves the review and updating of the organizational and structural plan for the organization taking into account the strengths and weaknesses of the successor. The following needs to be identified: the roles and the responsibilities of the successor, the filling of key positions, structuring of the business to fit the successor, the potential roles for the retiring owner, any legal complications, and financial issues.
7. Business valuation. This section is relevant only if the business is being sold. Passing the business to a family member would not involve a business valuation.
8. Exit strategy. With any succession, ownership will be transferred, and you will remove yourself from the day-to-day operations of the business. Alternatives will be compared, and a framework for making your final choices will be developed. The transfer method and the timelines are decided. The exit plan should then be published and distributed to everyone who is involved in the succession process.
9. Implementation and follow-up. The succession plan should be reviewed regularly and revised as situations change. It should be a dynamic and a flexible document.

As difficult as the planning process can be, the goal should be a succession plan that will be in the best interests of all—or most—of the parties involved. Business interests should be put ahead of family interests, and merit should be emphasized over family position.“Family Succession Plan First Then the Succession Plan for the Family’s Business,” Family Business Experts, 2011, accessed October 8, 2011, www.family-business-experts.com/family-succession-plan.html.

Sources of Conflict

The specific causes of conflict in a family business are many. Because the typical understanding of conflict in family businesses is that conflict refers to negative conflict that is unhealthy and disruptive, negative conflict is the focus of this section.

The PricewaterhouseCoopers Family Business Survey“Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08,” PriceWaterhouseCoopers, November 2007, accessed October 8, 2011, www.pwc.com/en_TH/th/publications/assets/pwc_fbs_survey.pdf. identified a core group of issues that are likely to cause tension.

Add to this the fact that “family firms are prone to psychodynamic effects like sibling rivalry, children’s desire to differentiate themselves from their parents, marital discord, identity conflict, and succession and inheritance problems that nonfamily businesses do not suffer from,”Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84. and it’s easy to see how the family business is a fertile field for negative conflict.Michael Harvey and Rodney E. Evans, “Family Business and Multiple Levels of Conflict,” Family Business Review 7, no. 4 (1994): 331–48, as cited in Kimberly A. Eddleston, Robert F. Otondo, and Franz Willi Kellermanns, “Conflict, Participative Decision-Making, and Generational Ownership Dispersion: A Multilevel Analysis,” Journal of Small Business Management 46, no. 3 (2008): 456–84.

Several other sources of conflict can occur in a family-owned business. A sampling of those sources is discussed here. All have the potential to adversely impact family relationships, business operations, and business results.

• Rivalry. Harry Levinson from the Harvard Business School maintains that, “the fundamental psychological conflict in family businesses is rivalry, compounded by feelings of guilt, when more than one family member is involved.”Harry Levinson, “Conflicts That Plague Family Businesses,” Harvard Business Review 71 (1971): 90–98. This rivalry can occur between father and son, siblings, husband and wife, father and daughter, and in-laws with members of the family that own the business.
• Differing vision. Family members will often disagree with the founder and with each other about the vision and strategy for the business. These differences “can create fear, anger, and destructive attempts to control decisions that are divisive and counter-productive to making and implementing sound decisions.”“Common Sources of Dysfunctional Conflict in Family Businesses,” RJW Consulting, accessed October 8, 2011, www.rjweissconsulting.com/businessDevelopmentNewsDetail.asp?ID=2. Rivalries that spill into the workplace can get nasty, leading to destructive behaviors.
• Jealousy. There is always the potential for jealousy in the family business. It can arise from feelings of unfairness in such things as compensation, job responsibilities, promotions, “having the ear” of the business founder, and stock distributions. It can also arise with respect to the planned successor when there is a difference of opinion about who it should be. If it is not resolved, jealousy has the potential to divide the family and destroy the business.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262.
• Succession. Succession is always a big obstacle for a family business. In some cases, the founder may feel that his or her children are not capable of running the business. This will cause obvious tension between the parent and the child/children, such that the child or children may leave the business in frustration.Nigel Finch, “Identifying and Addressing the Causes of Conflict in Family Business,” Working Paper Series: University of Sydney, May 2005, accessed October 8, 2011, papers.ssrn.com/sol3/papers.cfm?abstract_id=717262. This, in turn, becomes problematic for succession. “Who gets what type of equity, benefit, title, or role can be major sources of explicit conflict or implicit but destructive behaviors.”“Common Sources of Dysfunctional Conflict in Family Businesses,” RJW Consulting, accessed October 8, 2011, www.rjweissconsulting.com/businessDevelopmentNewsDetail.asp?ID=2. It is also true that while the founder of the business wants to continue family ownership and leadership of the business, this may not be true of his or her immediate family or later-generation family members.Peter S. Davis and Paula D. Harveston, “The Phenomenon of Substantive Conflict in the Family Firm: A Cross-Generational Study,” Journal of Small Business Management 39, no. 1 (2001): 14–30. This can create substantive conflict during succession planning.
• Playing by different rules. This cause of negative conflict “often presents itself as a form of elitism or entitlement that exists simply by virtue of being in a family that owns a business. Examples show up in allowing one or more family members to exhibit deficient standards of conduct or performance that violate sound business practices or important requirements that all other employees are expected to follow. Such behaviors can be divisive and demoralizing to all employees and customers as well as harmful to the reputation of the business.”“Common Sources of Dysfunctional Conflict in Family Businesses,” RJW Consulting, accessed October 8, 2011, www.rjweissconsulting.com/businessDevelopmentNewsDetail.asp?ID=2.
• Decision making. If roles and responsibilities are not clearly defined, conflict will arise over who can make decisions and how decisions should be made. This will lead to confusion, uncertainty, and haphazard decisions that will put the company at risk.
• Compensation and benefits. “This is one of the most frequent sources of conflict, especially among members of the younger generation.” A person’s compensation is inextricably linked to his or her feelings of importance and self-worth. Compound that with the emotions associated with being a member of the family that owns the business, and you have the potential for explosive negative conflict. Clearly, this is not in the best interests of the business.Wayne Rivers, “Top 15 Sources of Conflict in Family Businesses,” Family Business Institute, 2009, accessed October 8, 2011, www.familybusinessinstitute.com/index.php/volume-6-articles/top-15-sources-of-conflict-in-family-businesses.html.

Avoiding Conflict

Some measure of family squabbling is expected in a family business. Some of the arguments will be logical and necessary. However, “it’s important that they remain professional and not personal, because squabbling among family members in a work environment can make the employees and customers feel extremely uncomfortable, and can give them grounds for legal claims against the business.”“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150. The negative effects of family squabbling are as follows:“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.

• Unprofessional image. Family squabbling conjures up images of children—immaturity and pettiness. This sends a signal to customers and other employees that they are not in a professional environment that focuses on the right things.
• Uncomfortable environment. It is embarrassing to witness squabbling. No one likes to be in an awkward atmosphere; squabbling can cost you customers and employees, and it may result in expensive and unpleasant lawsuits. This can affect your bottom line very quickly.
• Discrimination. Nepotism is one of the biggest dangers of working in a family business. Arguing with relatives will only reinforce to other employees that they are in a family business. This can quickly lead to feelings of disparate treatment which, in turn, can lead to discrimination charges.
• Legal troubles. In the worst cases of family squabbling, disagreements over business can lead to lawsuits. If one family member’s role is minimized and his or her authority is restricted, this is violating the person’s rights as a shareholder. This can lead to an oppressed minority shareholder suit against the family business. This would be expensive, it would be ugly, and it could lead to the demise of the company.

Avoiding conflict is no easy feat. However, there are several things that a family business should consider. First, there are consultants who engage in conflict resolution for a living. The possibilities should be checked out. If the budget can handle the costs of a consultant, it could be the best choice. A consultant, having no reason to take one side or the other, will bring the necessary objectivity to resolution of the conflict.

Second, emotional reactions should be differentiated from problem-solving reactions. Family members need to take a professional perspective rather than that of an irritated sibling, parent, son, or daughter.“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150. It will probably be difficult to do this, but it is important that it be done.

Third, focus on the professional role instead of the family role. “Make sure it’s clear what the expectations and attitudes of all your employees are…Because you’re a small business, you might not have as strict a policy as a large corporation, but it would still be helpful to put it in writing, such as in an employee handbook, which carries legal responsibilities to both family and outside employees.”“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.

Fourth, encourage honesty from the beginning. When first starting to work together, it is important that family members sit down together to talk about potential conflicts that might arise. Acknowledging that it will be more difficult to work together because of being family is a good beginning. Treating family members and the professional environment with respect and expecting honesty when someone steps over the line should make for a smoother process.“How Family Squabbling Affects Other Employees—and Customers,” National Federation of Independent Business, 2010, accessed October 8, 2011, www.nfib.com/business-resources/business-resources-item?cmsid=52150.

Last, the founder should try to keep the conflict constructive. This means stimulating task-oriented disagreement and debate while trying to minimize interpersonal conflicts.George Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011. This will require a fair decision-making process. For people to believe that a process is fair, it means that they mustGeorge Ambler, “Constructive Conflict Is Essential for Creating Commitment to Decisions,” May 15, 2007, accessed October 8, 2011.

• “Have ample opportunity to express their views and to discuss how and why they disagree with other [family] members”;
• “Feel that the decision-making process has been transparent, i.e., deliberations have been relatively free of secretive, behind-the-scenes maneuvering”;
• “Believe that the leader listened carefully to them and considered their views thoughtfully and seriously before making a decision”;
• “Perceive that they had a genuine opportunity to influence the leader’s final decision”; and
• “Have a clear understanding of the rationale for the final decision.”

Customer Value Implications

When people think about family businesses, they usually think friendly, “quality, wholesome, and continuity.” Customers feel that they have a connection to the business because they also have a family. It is something customers feel they can trust.“Promoting Family Brand Linked to Companies’ Financial Success,” Austin Family Business Program, September 15, 2008, accessed October 8, 2011, www.familybusinessonline.org/index.php?option=com_content&view+article&id =38:promoting-family-brand-linked-to-companies-financial-success-&catid=13:latest -news&Itemid=39. Customers are reminded that there is a family behind the business, not a faceless corporate entity.Sahil Nagpal, “Family Businesses Perceived of Greater Value by Customers,” Top News, August 15, 2008, accessed June 1, 2012, http://topnews.in/family-businesses -perceived-greater-value-customers-259364. These are important sources of customer value.

The high priority that family businesses place on community involvement and the “reputational capital attributed to the family name” also translate into a perception of greater value by the customer.Sahil Nagpal, “Family Businesses Perceived of Greater Value by Customers,” Top News, August 15, 2008, accessed October 8, 2011, topnews.in/family-businesses -perceived-greater-value-customers-259364. “Family business’s identification with the family name motivates a greater emphasis on serving customers and consumers effectively, such as through providing quality products and customer services.”Justin B. Craig, Clay Dibrell, and Peter S. Davis, “Leveraging Family-Based Identity to Enhance Firm Competitiveness and Performance in Family Businesses,” Journal of Small Business Management 46, no. 3 (2008): 351–71. The emphasis of the family business on its family identity may, in fact, contribute to its competitive advantage. “It is conceivable that family businesses who promote their familiness build a reputation in the market place related to customers’ positive perception of the family.”Justin B. Craig, Clay Dibrell, and Peter S. Davis, “Leveraging Family-Based Identity to Enhance Firm Competitiveness and Performance in Family Businesses,” Journal of Small Business Management 46, no. 3 (2008): 351–71. The long-term source of value for the customers of family businesses may rest with the belief that the businesses are customer-focused.

Cash-Flow Implications

A family business can help or hurt its cash flow depending on whether it compensates family members at market value. If a family member’s compensation is based on “family values,” such that the parents’ compensation is excessive and the children’s compensation is much less than their fair market value, this would give an inflated picture of the company’s profitability.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344. However, it will help the company’s cash flow because they will have more money to spend on the business. If, however, the children’s compensation is excessive, often based on housing and family needs of the family members as opposed to their worth to the business, this would give an unrealistically low portrayal of the profitability of the business.Bernard J. D’Avella Jr. and Hannoch Weisman, “Why Compensation for Family Members Should Be at Market Value,” Fairleigh Dickinson University, 2010, accessed October 8, 2011, view.fdu.edu/default.aspx?id=2344. This will hurt the company’s cash flow because the amount of money available to spend on the business will be reduced.

Digital Technology and E-Environment Implications

It is estimated that about 40 percent of US family-owned businesses survive into second generation businesses, but only about 13 percent are passed down successfully to a third generation. One of the main reasons for this is that technological change moves so swiftly that it bypasses the older generation. “Unless the next generation is poised to update, and can get buy-in from longtime employees wedded to ‘the way we always did it,’ a business can quickly become obsolete.”Karen E. Klein, “When the Third Generation Runs the Family Biz,” Bloomberg BusinessWeek, April 9, 2010, accessed October 8, 2011, www.BusinessWeek.com/smallbiz/content/apr2010/sb2010049_806426.htm. It is understood that family businesses will have different technology needs depending on their size, industry, and growth objectives. For many family businesses, however, the move to greater technology integration should be seen as a natural part of business evolution.

With respect to e-business and e-commerce, the commitment of a family business to digital technology will be a necessary precursor to the integration of e-business solutions. E-business is discussed in more detail in Chapter 4 "E-Business and E-Commerce". The commitment to e-commerce should also be seen as a natural part of business evolution and a necessary response to the ubiquitous nature of the Internet. E-commerce for the small business is also discussed in greater detail in Chapter 4 "E-Business and E-Commerce".