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Beware of Joining a Family Business

 

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Back in Lesson #42, I wrote about the pluses and minuses of working with family members. This post talks about whether a third-party employee should sign up to work for a family-owned and operated company. Hopefully this advice will help you avoid a lot of the unexpected grief that comes with family businesses.

WHAT IS A FAMILY BUSINESS

First of all, we need to define what we are talking about here. A family business is one where one family owns the majority of the company (and most likely 100 percent of the equity), and often has one or more family members operating in the management team.

HOW IS A FAMILY BUSINESS DIFFERENT

There is not one single answer here. Typically, the biggest differences versus non-family businesses are: (i) there are no third parties on the board of directors or advisors to help the company make decisions; (ii) this usually means there is no one to keep the family-member CEO accountable for making the right decisions to maximize shareholder return; (iii) this CEO also makes financial decisions at the intersection of what is best for the company and what is best for his or her family; and (iv) decision-making typically starts and ends with the family members of the management team (even if outside managers are involved).

WHY THIS MATTERS

The worst thing that can happen is you think you are joining a business that will approach business growth with a “business first and business only” mindset, and then those types of strategies and decisions are overridden by personal needs of the family. For example, let’s say the business needs outside capital to hit its goals.¬†A family member may not dig into his or her own pocket for these funds (as it may be better spent on their kid’s college education, in their mind), and may be unwilling to raise it from outside investors (as they don’t want to deal with the change in 100 percent control that they have today).

Not all family businesses are poorly managed or have these problems, but the vast majority struggle with issues like these. This puts strains on the relationships between the family members and the non-family members that are participating as part of the management team.

A CASE STUDY

I was working with a company that was family-owned and operated. They wanted to materially scale up their business and started to hire professional managers around the table. The managers told the company it needed to raise capital to effectively hit its goals, materially raise salaries to attract talent and launch a stock option plan to retain talent.

As a result, none of the above actions were accomplished. The company simply lowered its growth target to a more affordable level within the cash flow of its current business (upsetting the outside managers that thought they were joining a faster growth business), they partially raised salaries (but not to the full level required to be competitive) and didn’t think a stock option plan was needed (based on the poor advice they were getting from inexperienced advisors).

Worst yet, the company didn’t fully appreciate the long-term nature of investing in sales and marketing in a business selling into enterprise scale companies. The limited investment the company did make (a fraction of what was needed), was unwound the minute the company got into a cash crunch (which was easily predicted by the outside managers well ahead of time, but ignored by the family members that thought they could get away with a lower spend scenario). And, I am not aware of any business that can quickly grow without fully investing in sales and marketing. So, now the whole plan is in jeopardy.

Instead of doing it right from the start (raising enough capital and solving the recruitment issues), going down the “half-baked” route only caused more strains and heartache on the business, negatively impacted the company morale and resulted in a revolving door on talent.

BUYER BEWARE

When you are looking to join a new company that is family-owned and operated, it is critical you do your homework first. Always bias family-owned companies that have professional outside boards of directors or advisors that can help keep the family executives educated and accountable on the best ways to realistically build a business. Otherwise, be prepared to work for some family’s lifestyle business, where the only opinions that are truly listened to are their own, and driving material and sustainable growth will be hard to achieve.

 


 

Reprinted by permission.

Image Credit: CC by John Ragai

About the author: George Deeb

George Deeb is a managing partner at Red Rocket Ventures, a Chicago-based startup consulting and fundraising firm with expertise in advising Internet-related businesses. More of George’s startup lessons can be read at “101 Startup Lessons — An Entrepreneur’s Handbook.”

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