Family businesses are kind of like families themselves: They’re cherished, they’re precious, and sometimes they’re taken for granted by their various members.
Families are complicated, and so sometimes it’s just easier to leave things the way they are. But the consequences of getting complacent about the engine that drives a clan’s prosperity are often graver than many realize.
“As I see it, complacency threatens the value of a business in two different ways,” said Eric Czepyha, director of business services at Northern Trust, a Chicago-based financial services company. “One, you might be fine being complacent in your family business, but chances are at least one of your competitors isn’t. The value of your business is going to go down because your competitor is going to think of something creative to take market share away from you.”
The second issue is a vulnerability to sudden major changes. Czepyha saw this during COVID, when many family businesses were unprepared for developments such as working from home or an unanticipated surge in customer volume. “And so that complacency, in maybe lack of motivation or innovation, was harmful to those businesses,” he said.
While the responsibility of wealth preservation often falls to the second, third, or fourth generations of a family business, some see the generation that founded the business as the one most likely to take its eye off the ball. “What they did was build the business the way they wanted it, and mostly what they wanted was a little kingdom,” said Wayne Rivers, co-founder and president of the Raleigh, North Carolina-based Family Business Institute, an advisory firm now owned by the insurance company Travelers. “Nobody could tell them something was wrong, because all they had to do was look around and say: 'You know what? Look at what I’ve built here.' ”
Getting an outside perspective
Industry experts often recommend that family businesses bring in a team of third-party advisers to prevent employees who are also family members from taking advantage of the cozy nature of a homegrown operation and to help resolve internal disputes.
“Some of the more successful families that run businesses have an independent board of advisers or board of directors that can hold each family member accountable,” said JJ Feldman, co-head of wealth management at Seattle-based Helium Advisors, which provides wealth management services for high-net-worth individuals and families. “Then also, in conjunction with the wealth management and tax advisers, some have a psychologist on staff that helps counsel the different members regarding their strengths, weaknesses and how to work together to resolve conflicts.”
The logical extension of bringing in fresh opinions is the creation of a set of rules that guide entry into the business and the criteria for remaining a part of it. Do you need to have a college degree? Do you have a previous job at which you gained a promotion?
“I had a client one time creating two rules that required church attendance or some sort of attendance of a spiritual nature, because that was important to them,” said Rivers. “They believed that it was part of their success.”
Another perspective that has filtered its way into many successful family businesses in recent years is the idea that the children of the founders won’t necessarily be entitled to all the wealth accrued by their elders. Inspired by high-profile billionaires such as Warren Buffett — who told his kids that he planned to give most of his fortune away to charities — today’s family business owners are more mindful of how their wealth can disincentivize their progeny from producing their own wins.
Feldman often points his clients to the book More Than Money by Michael Cole as a primer on how to navigate this delicate topic. Cole promotes using philanthropy to unite the generations of wealthy families. Doing so provides an opportunity to be upfront with the younger generation that they will not succeed in life without putting their own hard work and passion into something they genuinely care about.
“These days, a lot of wealthy families are communicating early on — hey, we’re giving away the bulk of our wealth,” Feldman said. “Like, you’re not going to get $500 million, you might only get $10 million. They’re kind of setting the tone early.”
Family (business) values
Having a complacent attitude toward something so essential to a family’s well-being often speaks to an underlying problem that remains verboten among its members. That’s why setting a good example for productivity and responsibility is so important for the leaders of the business. Much in the same way the CEO of a public company is responsible for the culture of the organization, the head of a family business needs to model the professional way to conduct business.
“Kids are very observant of what you do,” said Northern Trust's Czepyha. “It’s important to have the right type of communication around wealth in the family business early on with the next generation.”
By telegraphing the importance of caring about others, whether it’s other family members or philanthropic benefactors, the older generation creates a flexible framework for the business, however things develop.
After all, the family may ultimately decide to sell the business, branch out into other industries and/or establish a family foundation.
“As that family business grows, the family evolves into building not a family business but what we call a family enterprise,” said Czepyha. “And what that does is it starts to bloom. It starts to remove the family’s identity from being entirely wrapped up in the business itself.”