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9 Rules for Family Businesses

By Sasha-Lee de Bod

Running a family business seems fairly simple but in essence, it thrives on intricacies.

Blood is thicker than water – family businesses can destroy this idiom instantly with complications and chaos down the line. In any family business, there should be a clear plan with guidelines, rules, a formal structure and most importantly proper agreements to ensure that each member knows what is expected of him or her. 

 

The biggest myth in family business is surely “its family we can trust them, we know them, we can work together, no problem.”

The business through generations:

  • The first generation starts the business
  • The second generation builds the business
  • The third generation destroys the business
At Franchising Plus, we have worked on various family businesses, and we have experienced that many of them family businesses do not have adequate rules and structures in place to run the business effectively or to ensure long term continuity for generations to come.

 

We have put together 9 rules on family business to assist in this regard:

  1. Not all members are entitled or equal

  • Generally, in a family business there may be a few  family members and not all of them are equal, even though they all believe they should be rewarded equally.  It is important to tend to the business in a corporate like manner in the sense that members should earn based on performance and involvement.
  • The eldest family member doesn’t have to be the leader/managing director, family businesses should appoint the ‘head’ member most suitable and capable for the position
  • A good example of entitlement is all family members wanting to claim rights to the business or be reimbursed even though they aren’t activity contributing to the success thereof.
  1. Family members outside the business should be dealt with carefully and fairly

  2. The impact of spouses

    • In many instances, members talk to spouses about business activities after hours. This can be very dangerous as spouses only hear one side of the story and don’t always understand the situation or the business. This can cause family friction.
  3. Non-Family members

    • The problem that normally arises with a family business is, discussions are held at home, away from the office i.e. Sunday around the dining room table during lunch.
    • When non-family members are part of the business it excludes them from discussions and decisions at times
    • It is vital to note that there is a time and place for business talk and all members need to be involved/considered
  4. The role of a neutral non-executive

    • Every family business needs to appoint a neutral non-executive because at times there may be emotional involvement amongst the family members and someone with an objective view would help moderate any issues. 
    • A neutral non-executive with a strong business aptitude should fulfill the role of mediator and arbitrator to understand not only the emotional impact on one another but also on the business itself.
  5. Importance of corporate governance, structures, policies and procedures

    • Rules and practices should be established to ensure accountability, fairness and transparency
    • Trusts, wills and agreements should be drafted to govern relationships and manage expectancies between members
    • Solid agreements should be drafted
    • Clear policies and procedures should be developed i.e. clear dividend and capex policy
  6. Shareholding and allocation of shares

    • Shareholding structure should be determined upfront and allocated accordingly
    • There is always the debate of allocating shares in terms of number of children vs number of families – this should be dealt with on a case by case basis to determine the best way forward for each family business
    • Make sure you do the paperwork and process upfront to avoid any unnecessary chaos in the future, especially when a death of main member/owner occurs
  7. Exit Policy for members

    • At some stage, some family members would like to leave the business due to other business opportunities, emigration, etc,
    • It is important to have strong agreements in place with rules and conditions to determine the situation and way forward upfront (have the contingency plan with what if scenarios)
    • Once a member has exited the business, they need to be isolated from business discussions and activity i.e. if their name was on a trust and they had signing rights it needs to be changed to the new relevant member
  8. Business first, family second

    • Remember, business is business and business decisions need to be made no matter how hard the verdict is.
    • Family business is very intricate and due to emotional involvement, business decisions are often taken personally, causing family fights and complications.
    • Take caution when hiring or including family members purely on their connection. The business requires capable staff members who will perform in the assigned areas
    • We have found that the more successful the business the more family members want to be involved.
    • Don’t take your work stress home with you. With a family business – lines between work and home life tend to blur.