According to the FBA Family Businesses make up 70% of all Australian companies, covering such a wide array of industries it is often thought that the family problems they face are as different as the products and services they provide. This is not the case, Family Businesses by their very nature face similar issues and pitfalls that can easily be avoided through recognition and taking  steps to address  them such as bringing in a family advisor. Below is my latest contribution to Australian Bus and Coach Magazine where I outline the six of the most common mistakes that can have a significant impact on business success and family harmony. David Harland – one of  Australia’s leading authorities in family business sector.

The commencement of a new year is often when we stop, reflect and take stock in both a personal and business sense.  Each new year brings challenges and opportunities. Some are beyond our control but many can be managed through active planning. As we embrace 2013 I thought I’d identify six common traps I see family businesses falling into. Avoiding those traps could be  critical to boosting profitability and taking the next step in building a healthy, multi-generational business for your family.

1. Lack of Succession Planning

This remains one of the most critical challenges to many of the businesses we serve. Unfortunately, too many families are not actively developing a succession plan and grooming successors, leading to potential business failure if a transition is forced unexpectedly. Early planning and a clear transition process can help transfer ownership while minimising conflict and harm to the business. Additionally, active succession planning can uncover transition structures that will minimise the tax burden on business owners and their next generation. Another important aspect of succession that is sometimes forgotten is retirement planning. For many family business owners, their stake in the business is their largest financial asset and delaying retirement planning can threaten succession, creating a situation where the only means of funding retirement is selling to an outsider. Time is your ally, and planning the transition early will help you avoid costly mistakes later on.

2. Unclear Family Hiring Practices

Family businesses approach legacy hiring in different ways. Some have an open door policy for relatives, while others treat family members like any other prospective employees. It’s natural and healthy to expose family to the business when they’re young, so that they can make an informed decision about their career. But, a job with the family business should not be an entitlement or a fallback option in case other plans fail. Unqualified managers are major factors in business failures. We’ve seen a few best practices emerge for hiring family members: a) requiring degrees or advanced training, b) requiring outside experience including management experience, and c) competing equally with non-family applicants for an open position.

3. Poor Communication

Keeping lines of communication open between business managers and family stakeholders who are not actively part of the business presents a unique challenge. Inactive family members may have different opinions and expectations from members still working in the business, but if they have ownership stakes, they must be kept in the loop. Building governance structures like a family council or a board of directors helps create a unified vision for the business. Formal communication systems also help educate family members about the business, including understanding the company’s financial performance and future opportunities.

4. Unfair Compensation

One of the leading causes of friction between family and non-family employees is compensation levels. If your business pays (or promotes) family members differently than non-family employees, you may be setting yourself up for trouble.  Address this issue by clearly identifying roles, expectations, and requirements for promotions and bonuses. If family members are being compensated differently, be clear about the reasons why and ensure that all employees are being paid market wages.

5. Confuse Family Time with Business Time

When your family members are your coworkers, it can be difficult to avoid bringing business home or having work conversations during family time. However, mixing business and personal matters can create havoc when running a business together. It’s critical to respect personal boundaries and compartmentalize – don’t bring work conflicts home and, as far as it’s possible, don’t bring up personal issues at work. If it’s necessary to discuss business outside the office, schedule it away from family time and designate time when shoptalk isn’t allowed.

6. Out-dated Ownership Structure

An improper business structure can make it difficult to access credit or bring in partners, and worse, it could create friction between family members. As family businesses grow and bring on new family members and employees, ownership structures must evolve. To avoid this trap, review your current structure and ensure that it has not outlived its usefulness. Depending on the size and longevity of your business, it may be time to incorporate, or to redesign the capital structure for active and inactive family members.

After advice on Family Business? contact FINH on 07 3229 7333