How to Run a Family Business Without Killing Each Other
As finding the ideal co-founder is a difficult and risky process, it’s not surprising that many entrepreneurs turn to family to launch businesses. Indeed, family businesses comprise 80 percent of all business enterprises in the U.S. and generate 60 percent of the country’s employment, according to nonprofit organization Family Firm Institute. But that doesn’t mean it’s easy.
Running a business with family requires discipline, planning and recognition that family relationships are fragile and come ahead of everything else.
My first business venture was a snack store that my identical twin brother Andy and I operated out of our high-school lockers. Fast-forward 15 years and we’re still working together, employing over 30 people in four self-funded companies.
I’ve learned many lessons since founding my first company but for those thinking of starting a family-run business, consider these tips:
Select a leader. A yelling match between my brother and I taught us this important lesson early on: Companies managed by a committee of relatives can trigger bitter disagreements and lead to execution paralysis.
Designating someone as the leader with the final say ensures a company can avoid this potentially toxic and damaging predicament. In our companies, as in many non-family businesses, we elect board members annually who select the president from the pool of available candidates with the appropriate skill sets.
Avoid handshake agreements. Formalized contracts, share issuances, job descriptions and operating procedures are much more important in family-run companies. Relying on handshake agreements, though tempting, leaves room for interpretation and disaster.
To avoid potential family rifts make sure that everything -- from dividend payouts to disciplinary measures -- is in writing before business operations begin. These documents will allow you to share in the good times and navigate through the bad.
Relatives can’t be fired. Well they can, but it never ends well. The great grandson of a successful businessman recently told me about how the family fractured in the '40s when one of his uncles fired a sibling from the family business. The business was sold long ago, but the rift in the family remains to this day.
There is no foolproof way to avoid this risk but steps can be taken to reduce exposure. First, make sure that performance expectations are clearly outlined. Then establish strong reporting mechanisms so problems are identified quickly and objectively. Finally, only go into business with relatives with enough maturity to recognize situations when they need to leave (the same goes for you). Resignation is always better then termination.
If there are any doubts at the beginning of a venture, don't go into business together.
Make criticism constructive. Criticism between relatives bites harder than between regular colleagues.
I discovered this on one occasion when I made a critical remark to a sibling who didn’t expect it. The ensuing conversation descended into an insult-slinging match over childhood grievances before we decided to take a break and revisit the discussion later.
Acting on constructive criticism is mandatory for business improvement. Family members delivering and receiving criticism must take extra time to frame it in a professional context and must both maintain maturity. Clearly documented expectations and good reporting procedures can objectify discussion and make things easier.
Recognize blind spots. My business partners and I were raised under the same roof. We attended the same schools, went on the family trips together and shared family friends. As a result our outlooks are similar and while this is a great strength it guarantees blind spots in many situations. Keeping this top of mind and ensuring that a chorus of shared opinion between siblings doesn’t drown out feedback from employees and customers is critical to being successful.
One way we reduce blind spots is to ensure our team is composed of a strong and diverse group of people representing different geographies, languages and cultures. And can offer up contrasting opinions.
Building these tips into the fabric of a family enterprise can keep things rolling through the bad times so that relatives can share the success at the end of the day.
Sam Prochazka is co-founder and CEO of Novosbed.com, a North American mattress company specializing in memory foam bedding products. Prior to Novosbed, Sam, along with identical twin brother Andy Prochazka, co-founded real-estate RealPageMaker, a company that builds real-estate websites, where he continues to serve as company president.