Family Business Matters 04/22 10:47

Thorny Management Issues in Family Business

When it comes to managing a business, family businesses often struggle to
discuss several key issues, including compensation, individual performance and
transitions.

Lance Woodbury
DTN Farm Business Adviser

Family farms and ranches are similar to non-family agriculture companies.
Both kinds of businesses offer a product or service to the marketplace. They
use capital, buy inputs, manage labor, run equipment, deal with vendors and
serve customers. Furthermore, most business principles are the same regardless
of family or non-family ownership. Taking care of the customer, treating team
members well and managing working capital are principles found in almost any
kind of successful business.

When it comes to managing a business, however, family businesses often
struggle to discuss several key issues, including compensation, individual
performance and transitions. Indeed, the desire for family harmony, assumptions
about people's intentions and the habit of taking family members for granted
cause families to avoid some of the most important topics in any business.
Consider the following:

-- COMPENSATION. In a family farm or ranch, regular pay for family members
is often approached conservatively. Since the family members are the owners,
they get the profits, and they understand that if they don't make money, any
extra compensation is creating a loss. Thus, the family is often expected to
contribute their labor, or "sweat equity," to the enterprise. This can lead to
below-market compensation with a future promise of reward in the form of
profits or ownership.

The problem is that the future reward is seldom established in writing, as
it would be with a non-family manager. Someone not related to you would be wary
of only a verbal promise, but it is assumed a family member will stick around.
Without specificity, and when sweat equity doesn't materialize in the way or
amount or time frame expected by the person who made the contribution of labor,
feelings of wasted time or effort, or even shock, are pervasive. The family
relationship may become strained or permanently damaged.

Additionally, it seems difficult to acknowledge different levels of family
member contribution to the business, and the result is often that family
members are paid equally. Money is seen as a proxy for love or recognition, and
it doesn't feel good to be loved less (paid less) than another sibling. Many
parents struggle with the idea that by differentiating compensation, they are
signaling one family member has more, or less, value than another.

-- PERFORMANCE. In most positions held by non-family members, there is a
clear expectation of performance often embodied in a job description or
evaluation form, and there are clear consequences for not meeting those
standards.

But, for family members who don't perform, giving them an ultimatum or
firing them feels like a threat to their family membership. The accountability
for poor performance -- termination -- isn't a true reality for a family
member, so bad behavior goes unpunished. This lowers the morale of the entire
organization.

-- TRANSITIONS. Family commitment is a strength, setting many family
businesses apart from their non-family competitors. But every strength taken to
an extreme becomes a weakness. Family members can be so committed that they
won't give up their role, pass on their knowledge or encourage other people to
learn and grow, which is terribly frustrating for younger managers.

Or the senior generation member may delay any transitional activity by
annually announcing he or she will slow down "in about five years." This also
causes frustration and bottlenecks, and puts the business at risk, as so much
knowledge and responsibility are tied up in the generation approaching
retirement.

I often suggest that the key to being a good family business is not acting
like one. When it comes to compensation, individual performance and
transitions, try to act as if no one is related. It will help you act more
professionally, increase respect and ultimately be a better family business.

Lance Woodbury can be reached at lance.woodbury@pinionglobal.com




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