Family Business Transition Series - A Family Business Paradox: Family or Business – A Choice Between Equals?

April 06, 2017

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The success and longevity of any family business is dependent upon a well-thought-out succession plan. Our Family Business Transition Series is intended to provide the information and advice you need to find a solution that works best for your family and your business.

Families in business together live in a world that is definitely not black and white. While all business owners constantly face choices that have impact beyond the face of the decision, business families must add the family element into the equation.  Anyone involved in a family business understands that family and business overlap; a stone dropped in one pond will ripple into the other.

In an article entitled The Ten Hidden Arts of Successful Business Families (Family Business Magazine, Autumn 2009), John L. Ward cites what he believes are the keys to the success of long-lasting family businesses. Among the hidden arts is “skill at resolving paradoxes” - the ability to balance the many dilemmas and contradictions encountered by families in business together.

Paradox is not a commonly used word. Paradox describes an inconsistency between two elements that appear to be mutually exclusive, but can be mutually supportive. For example, do we believe in tradition or change? At first these would appear to be complete opposites, yet both represent great strategic alternatives. The skilled businessperson may use one or the other to their advantage, or find a balance between the two: “building on our tradition of change” or “building for the future while respecting the past.”

A business family faces numerous paradoxes that have implications far beyond their face value.  Let’s look at a few.  

1. Family first or business first?

This is the quintessential family business dilemma. Neither is wrong, but a family’s position on the continuum between these two philosophies impacts many important decisions.

A family-first philosophy may guarantee jobs for all family members regardless of their abilities or the needs of the business. A family-first philosophy may compensate a family member based on their personal needs rather than their value to the business.  A family-first philosophy can maintain harmony in the family but may jeopardize the health of the business.

A business-first philosophy may promote a more qualified non-family employee over a family employee.  A business-first philosophy may exclude some family members from working in the family business if they lack the necessary skills or if the business doesn’t need them.  A business-first philosophy helps to maintain a healthy business but may cause conflict in the family.

Somewhere along this line there is a balance point that meets the needs of the family while also sustaining the business. While in most family enterprises, the family unit is the number one priority it is important to note that it is the business that enables family members to live their chosen lifestyles, fulfill their need for achievement, and support their communities. The business must stay healthy.

Read more: The Importance of Family Councils

2. Fair versus equal

Most parents struggle with the concept of whether equal is fair, or whether fair is something other than equal.  While the idea of fairness is somewhat philosophical, the concept of equal implies some form of measurement - often in terms of money.  This paradox would imply that one can actually measure fairness.

If a father loves his children equally should he not treat them exactly the same in all matters? Does that then mean everyone who works in the business is paid the same or that all children receive equal shares in the family business? If fair means equal then all family members working in the family business would be paid the same regardless of their skills and market value. If fair means equal then each child would inherit the same amount of wealth or shares of the business in their parents’ wills.

Read more: Don’t Put the Cart Before the Horse

If fair is not necessarily equal, then children who are given or bequeathed the shares of the family business could end up receiving a much higher proportion of the family wealth than their siblings. If fair is not necessarily equal, some children would receive higher pay than their siblings based on their value in the employment market rather than on their gender or birth order.

In the paradox of fair versus equal, the goals of the business can sometimes challenge the values of the family. In many cases the majority of the family wealth is embedded in the business. Carving up the family business equally may not actually be fair. It can result in an accidental partnership of siblings who may not have otherwise chosen to be business partners. If, however, the family’s values equate fairness to equal measure, then to be truly fair, business owners will need to find other ways to equalize the distribution of family wealth among their children.

3. Merit versus entitlement

Ask most parents whether their children must earn the right to advance in the business and the answer will be an emphatic “yes”.  Observe the reality in many family businesses and you may find this is not necessarily how things work. The measurement of merit may be influenced by the irresistible power of entitlement. While a small measure of entitlement can be healthy in a family business, too much can be very damaging.

Next generation family business leaders are not necessarily chosen because of their leadership skills, but rather their DNA. Family employees are often not subject to the same performance evaluations as other employees. This can be frustrating to non-family employees who find their careers limited as family members move up the ladder.  

Business families can go to extreme lengths at either end of this paradox. In some family businesses there is an obvious hereditary right to lead the business, or to earn high income, or to enjoy the special perks.  At the other end, family employees can be subjected to far more rigorous performance standards than other employees.  It can be very oppressive to be a family member employed in a family business that stands at the merit side of this paradox.

Read more: Why You Need a Compensation Policy

Entitlement in its extreme can be a destructive culture in a business family. Unearned power or wealth can be the root cause of the demise of a successful business family. Yet why is it wrong for family members to benefit in some way from a family’s success in business? How do we maintain a culture of achievement while at the same time enjoy the fruits of our efforts? The family that can balance this paradox is truly skilled.

Family or business first, fair versus equal, merit versus entitlement; these are but a few of the many paradoxes business families must manage.  A successful business family understands that communication is the key to finding a good balance point along the continuum of the paradox line.

Families should spend time together discussing and writing down their values - the things in which they all believe. These agreed-upon values can then be reflected in their philosophy around how the family will be involved in the business. In turn, this philosophy can be used to develop clear policies or guidelines on how family members participate as employees and as owners of the business.  As they develop these policies and guidelines together, family members will begin to understand and manage paradoxes in a way that will shape their family and their business for generations to come.

For more information on transitioning your family business, please contact Brent VanParys or a member of The BDO SuccessCare Program™ team at 1 800 598 6400.