Family businesses have their own internal dynamics and complexities - this article examines some of the pitfalls and challenges both for family members, and those on the outside.

The power struggles and compromises of politics are well known and yet the politics of family-run firms – still a backbone of many economies – are not always as well chronicled. When succession and business transfer are up for discussion, these issues come into sharper relief. Wise planning is essential. 

Keith McAlister, partner, Thomson Snell & Passmore, talks about the “politics of family businesses”. Although he is based in the UK, many of his arguments resonate more widely, so the editors hope that readers in other countries find this article of interest. As ever, the editors do not necessarily endorse all views of guest contributors. Readers who want to comment should email tom.burroughes@wealthbriefing.com

To many people, the thought of having a family company that you can join and work for is a blessing. And of course, it often is!  However, for second, third and beyond generations, joining an established family company can also be fraught with difficulties. Below are some of the issues that we have seen arise and how they were dealt with.

Nepotism  
Well, it is hard to argue against this. However, a well-run business needs the right people doing the right jobs and there is no reason why those people shouldn’t come from within the family. We sometimes come across the next generation who are involved in the family business from their schooldays and who are fantastic assets the minute they enter the business. But not all businesses fire the imagination of the young and often a family business will benefit from the next generation picking up skills and qualifications in other sectors or industries, before they enter the family business and bring all that different knowledge with them. Most family businesses benefit hugely from the new ideas and alternative ways of working that outsiders bring and if the outsider happens to be a family member all the better.

Impatience 
As with non-family businesses, a family business needs ambitious and driven people.  Younger members can sometimes have fewer inhibitions within a family business than they would in a non-family business. We always advise firm but sympathetic management of the next generation, giving them encouragement and space to learn but with a clear understanding of their role and how that fits in to the overall business.

Earning respect  
Family businesses, like families, can take different approaches to learning and development. For some, careful, structured planning is key, for others it is sink or swim. Whatever the approach, the next generation coming into the business needs to earns his or her spurs but, more often than not, they need help and guidance. A good recent example of bringing a new family recruit into the business, which we were involved with, involved the board (currently all family members) providing a clear and genuine job specification. The reporting manager, a non-family member, was told bluntly that the new recruit was to be shown no favours.

Responsibility  
Family dynamics are easily replicated in the business. However, a dominant parent or the first generation of the family business can often find it hard to accept the next generation as equals or as having a better skill set in some respects. We are finding the rapid change in technology and the use of social media to sometimes be the next generation’s best way to demonstrate to the previous generation their competence and importance. They will, of course, have other strengths but it is important to give the next generation responsibility and support as they start to prove their worth.

Remuneration  
A family business can quickly run into trouble if the family members use it as a cash cow.   Tension can also arise where family members who work and contribute to the business do not get a fair remuneration that reflects their efforts. As delicate as it can be with families, those involved need to receive a fair wage in addition to any dividends that are more generally distributed to the family shareholders. There is no reason why a family-run company should not have bonuses, share schemes or similar incentives for family members as would a non-family business. With that comes accountability, which is vital to any business.

Non-family members 
Integrating non-family members into the business can often be a challenge. All but the smallest of family businesses will almost certainly need outside help. Where we often see the greatest potential for disquiet is where non-family members are brought in above the heads of some of the family involved in the business. To do this successfully, there needs to be transparency within the business as to why the non-family member is being brought in. We have seen the benefits of individuals with skill sets that the family business does not have coming in and, in some cases, shoring up a problem, in others transforming the business and unlocking potential.  We do also find that, in certain circumstances, an equity interest can be appropriate. This can help align the non-family member with the family or, where the intention is for a sale of some or all of the family business, help incentivise the non-family member in increasing the capital value of the business.

Remember, working for a family business should never be seen as a right but instead should be seen as a privilege.