A Formula for Thoughtful Decision-Making in a Family Business

Conflict has sunk more than a few family businesses over time.

To avoid it as much as possible—and navigate it when itinevitably rears its head—owners of family businesses needto adopt a thoughtful, calculated approach to decision-making. To see why, consider one story of a patriarch who runs acompany worth north of $300 million. Seeking to involvehis sons—both of whom were senior managers at otherfirms—at a high level, he offered them senior executivepositions in the company and positions on the firm’sgoverning committee. They accepted.But problems soon arose as the sons’ expectations andinterests clashed with the patriarch’s and with each other’s.The three family members began subtly sabotaging eachother’s efforts, resulting in the business suffering weakerfinancial performance. Within a few years, it was outrightwar—with the sons openly fighting with their father, eachother, and the company’s top brass.

Ultimately, the situation became untenable. The father, after reaffirming his love for his children andhis deep concern for their welfare and future, banished them from the business. They were no longerinvolved in any way with the management of assets or any other aspect of running the operation.The result: In less than a year, under the sole direction of the patriarch, the company was once againdoing extremely well. But the rough road could have been avoided with some thoughtful planningand expectation-setting in advance.

There are many ways to handle conflictsamong family members involved in abusiness.

For some successful entrepreneurs, interventionsled by family business coaches are successful.Different forms of conflict management consultingservices can be used. The patriarch in theexample above obviously went in a differentdirection.But whatever the specific situation, if you want tohave a very successful family business, the answeris often taking a calculated approach to decision-making.You need to look at business decisions throughthe lens of your family values and beliefs as wellas your obligations (as you see them). Toaccomplish this, it is very important that you beable to step back and appraise situations, peopleand other factors non-judgmentally to derive aworkable solution.

Values and economics

The key to thoughtful decision-making is to understand how your values impact your decision-makingconcerning your family business along with your ability to consider the economics of a situation—andto then balance values with financial implications.

The following formula puts thoughtful decision-making into perspective:

Family Values + Calculated Economics = Thoughtful Decision-Making

Let’s look at each component in more detail on the next page.

Family Values

There are some classic family business concerns that successful entrepreneurs often experience—suchas balancing family priorities, issues, and interests with business considerations. Family values andintent are typically built into the expectations for the company and those running it.

Certainly, a core asset of family businesses is very often the family itself—and children can be greatsources of strength and creativity. However, there are times when family bonds can prove detrimentalto the success of the company and the harmony of the family. If these matters are not capably dealtwith, the business and the family will continue to suffer.

We often see two scenarios in which children can be detrimental to the success of a business.

  • Well-intentioned but dysfunctional.Most of the time,when children are causing problems in afamily business,they’re not actually trying to do so. We generally find thatfamily membersintend to be positive and helpful—they’re not seeking to create family business strife.Entrepreneurs can usually identify family members whoare dragging down the business.Typically, these familymembers are not deceptive or conniving but are simplyout of theirleague.
  • Bad seeds.Bad seeds are family members—oftenchildren and other eventual heirs—who, in aMachiavellian manner, exploit the business for personalgain to the detriment of other familymembers. Althoughsubterfuge is regularly involved, in time everyone knowswhat is going on—and a great deal of acrimony tends toensue. Most times, the business seriously suffers as thefamily tries to hash out the conflicts.

Even though everyone would like the family to worktogether in a supportive and constructiveway, that justdoes not happen in situations where there are bad seeds. These family membersare very self-absorbed andcommonly feel entitled. Along the same lines, theyhabitually expect preferential treatment. Consequently,they tend to act in ways that damage relationships andthe functioning of the company.

Further complicating these situations, most entrepreneurs and other family members have a hardtime reining in family members who are disruptive and oppressive. For instance, parents generallyhave a hard time effectively punishing children for their negative behavior.

Important

Entrepreneurs need to recognize that even where their values are not inhibiting the optimal financialperformance of the family business, they can still make poor choices. Many entrepreneurs do not thinkthrough the financial implications of many of their decisions—which almost always leads to trouble.Further complicating these situations, most entrepreneurs and other family members have a hardtime reining in family members who are disruptive and oppressive. For instance, parents generallyhave a hard time effectively punishing children for their negative behavior.

Calculated Economics

There are a number of approaches to making financially smarter decisions in a family business. Oneof the most effective, of course, is to run the numbers. It is logical to write pro formas—formalfinancial statements—for each venture within your firm. For each major initiative, you can be well-served by developing a set of financials and using these calculations to help drive and benchmark the endeavor.

In this context, pro formas are similar to military strategies. Before embarking on any initiative, athoughtful leader will explore all of his or her options and possible outcomes, so an informeddecision can be made when changes in direction are inevitably necessary. Very few things unfoldexactly as anticipated, and running the numbers allows you to better adapt on the fly to newcircumstances and navigate turbulence.

Pro formas provide entrepreneurs with a clear understanding of the financial aspects of prospective decisions. They might project over several quarters key metrics such as (but not limited to):

  • Gross margins
  • Capitalized vs. variable expenses
  • Revenue (and each source)
  • Unit sales
  • Cost per unit
  • Rent, labor, payroll and other costs

Combining these financial assessments with your values results in thoughtful decision!

Ultimately, family business owners have to strike the right balance between their various values andthe need to be fiscally prudent and smart. If these are misaligned, bad results can occur. Put toomuch weight on values at the expense of economics and the business might fail to thrive—or evensurvive. Overemphasize money and you might find that family members become disillusioned oroutright hostile about the way the business is being run. And if that gets bad enough, it can hurtthe company’s fortunes.

But find that sweet spot and you’ll likely position your family business for success in the years anddecades to come—and avoid the type of conflict that can sink even strong companies

 

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