Family businesses are complex. At the intersection of ownership, business and family are competing objectives. Owners focus on return on investment; businesses emphasize growth, profitability, customer service and productivity; and families are concerned with nurturing, loyalty and self-preservation.
As a result, sometimes it can seem like success in one area means failure in another. When faced with tough decisions, such as which investment partner will be right for your employees or which child should be CEO, what do you do?
As a starting place we recommend asking yourself and your management team specific questions, which force clarity. One especially searching but helpful question is “Do we consider ourselves a family business or a business family?” While the answer may spark a difficult conversation, it’s the first step in revealing the values by which your family-owned business strives to operate.
Family-owned businesses can be classified into three categories based on whose interests take priority: family-first, business-first or family enterprise-first:1
- Family-first firms prioritize family.
- Business-first firms prioritize business.
- Family enterprise-first firms seek a balance.
Determining whether you’re a family business or a business family can help you establish which set of priorities will guide your business. You’ll have differing priorities on various issues, and that’s OK. The purpose is to understand how your family values drive the values of your business.
Below are three reasons why expressing this relationship is critical.
1. Family Values Provide a Basis for Key Decision Making
As your family-owned business moves from one generation to the next, the issue of how the business will govern itself becomes more crucial. John Ward, a family business researcher, has noted the evolution of a family-owned business eventually leads to more family members becoming governors rather than operators. As such, family-owned businesses inevitably face important governance decisions, including questions of leadership, family involvement and representation, performance evaluation, family compensation, etc.
These decisions become complex quickly, with no single answer suitable for every family situation. However, clearly expressing family values provides a framework to evaluate choices. The result is greater alignment between goals and outcomes for the business and family.
2. Family Values Create Long-Term Competitive Advantage
Competitive advantage has transitioned from the uniqueness of a product or service offering to the uniqueness of a sustainable business model. What you once could only buy at the store can now be delivered in hours. In regard to economies of scale, family-owned businesses may feel threatened, but they shouldn’t; family businesses are in a unique position. They possess what’s known as social capital. Social capital is defined as the relationship between individuals and organizations that facilitate action and produce value.2
Firms that understand their family values are more likely to use their social capital for competitive advantage, e.g., cultivating a strong culture to attract more talented workers or leveraging shared values with consumers to brand the product or service.
3. Family Values Affect Family Unity & Influence Continuity Planning
The ownership structure of many family-owned businesses disperses as the business transitions across generations. For example, while a founder-owned business may face the challenge of excessive family involvement, more mature family businesses struggle with bringing the family together.
This can become especially problematic as a business prepares to transition. As the family grows larger, there’s often less understanding of the business’s evolving needs. Consequently, many families make poor succession choices, failing to fully appreciate the need for thorough continuity planning.
A great way to unify the family, especially those who aren’t immediately involved in the day-to-day operations, is to establish family values through a document such as a family charter. This links business values and provides a clear line of sight for everyone involved.
Running a business can be challenging—but so can maintaining and nurturing healthy family relationships. When family-owned businesses externalize and prioritize their values as a family, they help ensure they’re successful not only as a business but, more importantly, as a family. For more information, reach out to your BKD trusted advisor or use the Contact Us form below.
1 Sharma, P., & Nordqvist, M. (2008). A classification scheme for family firms: From family values to effective governance to firm performance. In Tàpies, J. & Ward, J. L. (Eds.), Family values and value creation: The fostering of enduring values within family-owned businesses: 71–101. New York: Palgrave Macmillan Publishers. ↩
2 Adler, P.S., & Kwon, S.W. (January 1, 2002). Social capital: Prospects for a new concept. Academy of Management Review, 27, 1, 17–40. ↩