Obstacles to Family Business Longevity

A family business offers unique opportunities— and potential obstacles to the success of the business

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DOUBLE STANDARDS

Families sometimes make the understandable mistake of holding family members to different standards than other employees. It's often best to have a third party make the calls on salaries and promotions, Mendoza Management Professor James Davis says. At family-owned Guaranty Service Group, Inc., founder and CEO Louis Andrew formed a committee from his outside board of directors to evaluate and set the salary for his own daughter, the president and COO of a Guaranty Title subsidiary. Davis says studies show that such arrangements can improve a family business's ability to hold on to talent from both outside and inside the family.

FAILURE TO KEEP UP WITH THE TIMES

Some family-driven operations are so internally focused and driven they fail to keep up to date with market conditions, customer needs and technology or to reinvest in the business, says Chris Eckrich ('85), a consultant and adjunct professor at Mendoza.

OFFSPRING'S VARYING INTEREST AND ABILITIES

Eckrich recommends establishing standards early on for who gets to work in the business and who doesn't. "When guidelines are fuzzy—or worse, when there are no guidelines—everybody has different expectations. And when those expectations inevitably aren't met, there's pain and suffering."

CLOISTER SYNDROME

When family members never work anywhere but in the family business, the business's culture and knowledge can grow stale. Some family businesses require members who are seeking management positions to go to work for someone else for a time. They can bring back new competencies, says Management Professor James Davis. "If a company's weak in marketing, the return of a relative after five years at Leo Burnett can provide an upgrade in advertising services …"

BACKYARD DECISION MAKING

Left to their own devices, Eckrich says, most family businesses will communicate informally—just like families communicate informally. "And inevitably, someone gets left out." He recommends holding formal meetings to define governance and how the ownership group, board members and management team will work together. And don't forget to pose the big question at regular intervals, he says. That is, "Why do we want the business to stay in family hands?"