Is Your Family-Owned Small Business Making this Mistake?

Is Your Family-Owned Small Business Making this Mistake?

Written by: Jeff McDonough, Director of Human Resources, Union Savings Bank

Many small business owners would call their business a labor of love. This is especially true when members of your business management team are also members of your family or close friends. Seeing a dream you shared with someone in your life come to fruition is thrilling, whether you built the business from the ground up, inherited it through a succession plan or purchased the business from a previous owner. This management dynamic can also bring a unique set of challenges. One of the biggest mistakes owners of small businesses run by family members or friends can make is failing to maintain objectivity.

Managing working relationships is always more challenging when personal relationships already exist. This extends to decisions about human resources, board management, conflict resolution and succession. Finding tools and techniques to help you navigate these management decisions is critical to maintaining sound and objective governance.

Here are some important things to keep in mind when your small business partners are your friends or family members.

Consider outsourcing small business human resources management, payroll and benefits.

Making decisions about bringing new team members on board or parting ways with employees is already a difficult process. Personal relationships between small business owners and their management teams adds another layer of complication. Recruitment and retention are already major challenges, so outsourcing small business human resources management to an experienced firm can take a lot of pressure off you and your team. Outside consultants can also generate templates for employee evaluations that will encourage honest and objective feedback capable of catalyzing real change rather than hostility.

Keeping employees paid accurately and on time is yet another challenge small business owners face, especially when adding overtime, benefits and insurance into the mix. And if you are concerned about family members or friends under your employ gaining access to sensitive salary information, an outside consultant is a must. Not only will outsourcing free up valuable time for you and your team, it can also reassure any employees outside of the friends or family circle that they are receiving fair and objective treatment, at least as far as their pay and benefits are concerned.

Maintain objectivity with outside advisory board members.

Another important place to maintain objectivity is on your small business supervisory or advisory board. Not every family-owned small business has a board, but appointing one offers a host of benefits. Family Business Magazine points out that while small business owners may consult with attorneys, accountants and others whom they consider to be advisors, these professionals may not have the experience to offer business-oriented advice. Owners of businesses run by family members or friends may also peruse the same crowd to find these advisors, meaning that both their management team and outside consultants could all be members of the same circle. This isn’t necessarily a recipe for disaster, but it can contribute to less objective decision making.

The majority of family-owned small businesses in the U.S. have taken this fact to heart. In fact, of the 94% of family-owned firms surveyed in 2014 who were controlled by supervisory or advisory boards, representation by family members was 26%, or roughly one out of every four board members. This mix of family and unrelated board members can help encourage unbiased decision making that can benefit both the business and its employees, whether they are members of the “inner circle” or not. If your small business is not already governed by a board, or if your board is dominated by members of your managing family or friends, you may want to consider making a change.

You need a written procedure for conflict resolution.

Family members fight. Friends argue with each other. This is simply a fact of life, and thankfully many relationships can sustain the occasional turmoil. But when you are responsible for making business decisions alongside the person you are quarreling with, problems can arise and quickly get out of hand. This is why having a written procedure for conflict resolution is a must for friend and family-owned small businesses.

Within this written procedure, experts recommend setting a regular time for open communication between related small business owners and managers. This may be in the form of an open forum discussion or family council to help air concerns and grievances. Letting conflicts stew over time will only serve to inflate the issues at hand, so holding these meetings on a regular basis is a good way to get ahead of potential problems.

Another part of a written conflict resolution procedure for a friend, or family-owned business is the designation of an outside intermediary. This expert can help quarreling parties navigate a conflict in the most level-headed, objective way possible. It’s important to remember that this person or firm is not a go-between. Their job is to help guide you through a conflict by focusing on the facts in order to run your business effectively. Waiting until friends or family members are at their breaking point to find a mediator may be too late, so start your search when things are going smoothly and establish a baseline relationship.

Bring human resources into your small business succession process from the start.

Small business owners pour their hearts and souls into running their companies. As small business owners start approaching retirement age, many assume that their family-owned companies will be passed down to the next generation. Sadly, only 30% of family-owned businesses survive into the second generation, and only 12% make it into the third. Many factors contribute to these statistics, but one assumption in particular perpetuates this trend.

A dangerous assumption many owners of family businesses tend to make is that their family members will want to run the business. Even if the same family members are currently involved with the business, it doesn’t necessarily mean they want to be responsible for it once you’re not around.

Remaining objective throughout the small business succession process is difficult as it is, never mind when the added strain of relationships between friends or family members come into play. Passing down a business to someone based on family obligation, not aspiration or business acumen, is a potentially fatal mistake. Fortunately, this can be remedied by incorporating human resources procedures into the succession process early on.

Human resources and talent management blog TLNT recommends bringing HR to the forefront in the small business succession process. One of the pitfalls of many small organizations is their limited training for upper-level management positions. Making leadership training available to multiple employees within your small business – whether they are friends or family members or not – is a good way to ensure that your business will be transferred to capable hands when the time comes.

Your internal or outsourced human resources team should also consider outlining the succession process for your employees. Making this process as transparent as possible helps to build trust and, according to TLNT, can even encourage employees who may have sought career advancement elsewhere to stay put and work toward a higher level position.

The most costly assumption you can make in small business succession planning is that your unspoken, unwritten plan will be agreed upon by your business partners. Keeping everyone in the loop about this process through your human resources team can help your family-owned business beat the odds and survive long into the future.

Running a small business alongside your friends or family members can be a dream come true, on many levels. It can also create turbulence strong enough to damage both your relationships and the business you worked so hard to build. Maintaining objectivity by outsourcing human resources, creating a board with outside experts, documenting your conflict resolution procedures and incorporating your human resources team in the first stages of succession planning are four smart ways to keep your business running smoothly.

Discover more tips for managing and growing your small business on our Business Blog.

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