Minding Your Business: 10 Rules for Family Businesses

September 18, 2017 by and

Family businesses are the backbone of the U.S. economy. They generate more than 50 percent of the gross domestic product (GDP) and more than 70 percent of job creation. However, only about one-third survive into the second generation, and 12 percent into the third generation.

The secret to a successful family business is to treat it like a business, not as an extension of the family. There are many family-run insurance agencies. The successful ones tend to incorporate the following 10 basic tenants.

1. Do not create a job for a family member. Either you have an opening for which the family member qualifies, or you do not. If there is no suitable opening, wait until you need to hire someone and/or they have the appropriate qualifications.

2. Have the family member work somewhere else first. They must prove to themselves, to you and to the other employees that they can succeed on their own. It is not critical that it be in an insurance company or agency, although this would be helpful. It also is far healthier for the business to have them come in with some outside experience, fresh ideas and training.

3. Treat family members the same as any other employees. Family members might try harder or they might not try at all. They need motivation from the boss, just like any other employee. Apply all agency rules to family members and adhere strictly to performance evaluations and salary administration. Give family members responsibility and authority as they become ready for it. Don’t second-guess their decisions within the parameters of authority you have granted. This is difficult to do with any employee and much more troublesome with family members, especially children. Avoid the two extremes — either cutting them too much slack or riding them harder than other employees.

4. If possible, have family members report to non-family employees. Just because someone has the same last name as the owner does not mean they have the same level of authority, and everyone needs to know this. Keep in mind to treat them like any other employee. See rule No. 3.

5. Build a firewall between family and business issues. Never discuss family matters in front of other people in the agency. Use the family member’s name and try not to call each other dad, mom or junior during business hours. Do everything that you can to de-emphasize the family relationship when around other employees. Likewise, don’t discuss business at family gatherings, because this can put a strain on family relationships and bore other people in the family.

6. Be clear about the business succession plan. Family members should know the perpetuation plan so they know what is expected from them long before they are old enough to come into the agency. Don’t expect them to read minds. Pay attention to any child that might resent all the time in the past that was spent with the agency instead of them. Passive aggressive behavior by a jilted child can be very destructive to the business. Also, rivalries between siblings also can wreak havoc on an otherwise successful business. If necessary, heal old wounds with the help of professional counseling. It is also recommended that children who are not associated with the agency should not be owners. Non-active owners might not appreciate what it takes to run the business and sometimes are a “fly in the ointment.”

7. Have one clear successor. It usually is never a good idea to leave a business to two people (family members or not) on a 50/50 ownership split. The buck always has to stop some place. Two siblings can already have some built-in differences of opinion that make decisions more difficult to handle effectively. It can work in some cases, but these are the exceptions. At a minimum, put one outside person on the board of directors as a deciding vote. See rule No. 8.

8. Create a board of directors that includes non-family members. When advice is needed on dealing with sticky issues, it’s important to have someone involved without familial emotional attachments. Use outside professionals, such as CPAs, attorneys or consultants. If there often seem to be impasses, it might be a good idea to give voting rights to the non-family board member.

9. Sell the business and don’t gift it. Most people do not appreciate something they got for free. The concept is that if they pay for it, or have to sacrifice something for it, they will value it more and do a better job of running the agency. Also, keep the IRS in mind. You must properly value the ownership you turn over to family members either through gifts or cash transactions.

10. Make sure all participating family members agree to these guidelines. There is no sense in having guidelines or rules if no one agrees to them or if the rules are sporadically implemented. All family members must buy-in to these “rules” for the family business or they cannot be a part of it. This is where tough love comes into play. Children do best when the rules are clearly spelled out and consistently followed. The new motto needs to be “it’s nothing personal, it’s just business.”