Should you work with family in your business

As a family member, you are likely to benefit from a variety of advantages that you will not find in other businesses if you start or join a family business.

On the other hand, you may encounter some difficulties that are unique to family businesses.

Any business requires some level of governance, that is after all the framework within which internal and external exchanges between individuals and firms occur. Governance often starts as a simple extension of the entrepreneurial drive of the founders of the business, where the owner and leader of the business are one and the same. As ownership and leadership diverges over time, administration often becomes more complicated and more bureaucratic, creating more obstacles to the efficient management of the business. Family businesses, however, often have a competitive advantage over other businesses when it comes to the governance of the firm, primarily as the governance is based on trust.

Trust exists in family businesses based on social, economic and familial bonds that creates situations where an individual will forego short-term personal gain in favor of long-term relationships. The result is that there is a willingness to rely on others to take important actions but without the ability to either monitor or control their actions. Too little trust in a business, results in problems of coordination, control and, ultimately, undermines the leadership of the business. Too much trust, on the other hand, leads to situations where individuals are tempted to take financial advantage of their situation and relatively loose financial controls.

To achieve the optimal level of trust, there has to be a social framework included in the governance of the firm. Formal agreements and policies often fail because they fail to plan for the transition of leadership and ownership. The parties rarely, if ever, use the legal sanctions authorized in those agreements to settle disputes; and, families often prefer to rely on “common decency” in meditating conflicts. This also means that the optimal level of trust is not static but fluid as the ownership and the development of the management of the business evolves over time. The result is that, in drafting estate plans for family businesses (and especially Trusts) the documents must evolve and allow for flexibility over time. There are, however, some guiding principals in planning and drafting documents:

1. Documents need to promote trust as trust is the most powerful competitive advantage family businesses have,
2. Trust levels are highest at the onset of the evolution of the business, and lower when the second, third and further generations become owners and leaders. It is essential to have a mechanism for replacing trust with formal systems,
3. The needed changes in governance required to reflect the reduced role of trust will be resisted by the existing ownership and leadership as contrary to the prior behaviors that worked well but under different circumstances, and
4. There needs to be a mechanism by which family members who are owners but are not in the leadership of the business can either participate (through a family council) or can be bought out of the business (without harming the fiscal health of the business) at least once a generation.

All businesses require some level of trust to function smoothly. Family businesses can utilize trust into a competitive advantage. The optimal level of trust will evolve as the business evolves, both in the nature of the family ownership and in the framework of governance. In planning and drafting for family businesses, care must be taken to allow for trust to exist, and for the structure of ownership and leadership to evolve as the nature of the family business evolves.