RM Online - Have a plan when you add family to business

Last month, we discussed some of the problems that can arise when bringing family into the business. This month, we will try to offer solutions to make the transition smooth.

Successful work experience outside the family business before joining the family firm is generally seen as a very desirable, if not essential, component in family entry into the business. This eliminates nagging second thoughts by the family member, and others, over whether the person could really cut it elsewhere. It also brings in new ideas to the family business.

Often, though, it is more of a concept than a reality. There may be great excitement about the new college graduate joining the family business. The need for outside experience is rationalized away. The business may have a current need for exactly the skills and training possessed by the inexperienced family member. Going to work in the family business seems like a perfect fit; it allows the business to avoid hiring a stranger and the family member avoids the arduous task of job interviewing.

In the worst case, the family member has been unable to find and/or hold gainful employment elsewhere. There is absolutely nothing to support the idea that such a person will become successful simply by going to work in the family business unless the underlying reasons for their failures elsewhere are determined and corrected. Even then, successful outside experience has not been achieved.

Doing it the right way

The old adage, "an ounce of prevention is worth a pound of cure," really applies to family members entering the business. Most of the pitfalls can be avoided when family businesses, up front, write out and agree to guidelines that direct how family members will enter the business and what happens once they're in it. We call this a family participation plan. It addresses all the potential problem areas that can arise.

The following is a proposed family participation plan written to illustrate what the plan may look like.

It begins with a statement about the family's intentions in providing ownership and employment opportunities for family members.

"The Smith family views itself as having stewardship responsibility for the company started by our grandfather. Ownership will always remain solely in the bloodline of our grandfather. Family members are encouraged to consider making Smith Enterprises a place to invest their talents, and express their career aspirations, but only when it is a greater fit for both them and the company. Under no circumstances is there an obligation on either side to the other. Smith Enterprises will be operated with the best professional management available, whether family or non-family, and will adhere to common business practices of planning at every level and review of performance against those plans"

It continues with guidelines for specific issues. "Family members are expected to have the education, training and skills needed to fulfill the job requirements. Family members will not be hired by Smith Enterprises without three to five years of previous employment, achievement of at least one level of promotion, and having an overall above-average performance evaluation.

"Family members will not be hired into a position without an approved job description, will be paid at market rate for their position and receive approved company benefits appropriate to their position. Income that comes to family members active in the business from their ownership is not part of compensation for employment, and the two will be kept strictly separate.

"Every family employee will, for at least the first five years of employment, be supervised by a non-family manager subject to same hiring, performance and termination rules that apply to other employees. While not fair or just, family employees must hold to a higher standard of conduct and contribution to the business and will be expected to do so."

How to write the plan

The family participation plan is developed by the family. Some families involve only active family members and shareholders, while others bring in non-active and non-owning family members who have a sincere interest in the business. Family members who are now, or may be in the future, affected by the participation guidelines should be offered the opportunity to give input.

We often advise that in-laws be brought into the discussion because they have good ideas, and it strengthens communication and harmony.

Creation of the plan can occur through the family council, if one exists, or in a special extended family meeting for this purpose. Final approval of the family participation plan comes from the shareholders.

The best family participation plan is the one that is developed early, not the one with all the bugs worked out or the fanciest language.

It's never to late, and if it is your desire to promote a healthy family and business relationship, setting guidelines for family entry and involvement is essential.