How to Effectively Build a Family Business

If you’re thinking of starting or building a family business, read this first to ensure the model will be successful.
Latest posts by Jeff Karges (see all)

Competency Versus Relationship (Nepotism)

Every business hires employees based on some mixture of the candidate’s competency and how good/bad the relationship is with the candidate. Unfortunately, in a family business the default or predominant method of hiring is relationship. While the intentions are good, there is not only an increase in the usual business risk, but also a risk of damaging family relationships.

Three Common Pitfalls When Hiring Family

Pay

How harmful can it be to pay your own flesh and blood an “overly generous” salary? So what if he would only make half as much on the outside? The temptation is great to provide family a salary they would never make on the outside.

Performance

Sooner or later, the competent non-family staff get the message: relationship trumps performance. Sadly the same “job metrics” that are applied to the non-family employees are not applied to family. The result: sooner or later the good ones leave, recognizing that the playing field is not level and advancement potential is limited.

Benefits

Company cars, loans, expense reports that lack accountability, company AMEXs, business trips that morph into pleasure trips, etc., etc. soon become part of this seduction. The non-family staff frowns on the tendency of the owner to hand out unjustified and profit-killing benefits.

Times does fly and now at fifty years old, it is common for the family employee to have serious addiction issues, divorce, loss of self esteem, etc. Even if they hate their job, they will stay. Many times they are a “cancer” in the company as they become an employee relations and morale nightmare. They feel stuck and hopeless about ever finding a job on the outside. They often bury their “true career passion” and live with the constant anxiety of having no recourse if they ever lose their job.

So What Can The Family Business Do?

Before Hiring

Be sure to take the following steps prior to hiring a family member:

  1. Have written requirements that guarantee no family member can work for the family business until they have worked elsewhere for at least two years.
  2. Seek impartial advice: recruit an advisory board or consult with other family business owners.
  3. Require career counseling/skill assessment prior to job selection.
  4. An employee manual must be clear and enforced, and family members must sign and adhere to it. (Often the family business has 2 sets of rules: one for family and another for everyone else. Too many times a family member who deserves to be fired is not. This is a megaphone broadcasting: “Only non-family have to perform.”)

After the Hire

Perform regular (and honest) performance reviews and when needed insist on further education, focused on developing the family member’s natural skill set. Then if need be, have the moral character to let the family member go. It is an injustice to allow an incompetent person to stay in their job when it is harming the business and actually harming them. The sooner you address this, the better. There is never a good time to do the right/hard thing.

A Quick Test

Two questions:

  1. If you sold your family business today, who would the new owner keep and who would they let go?
  2. If they kept anyone from the family, how much would they pay them?

If you can’t evaluate impartially, then seek advice from a trusted employee (and act on it).

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