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The Honolulu Advertiser
Posted on: Wednesday, November 6, 2002

Family businesses must shift priorities

By Yvette Armendariz
Arizona Republic

Many family-owned companies grapple with this difficult question: What comes first, family or business?

"Certainly, family-first companies are one of the reasons companies can't get into the next generation," said Mike Cohn, a family-business counselor in Phoenix, Ariz. "The business becomes a piggy bank that everyone can draw from, and at some point the piggy bank runs dry."

The odds are stacked against a business surviving beyond the first generation. About a third of businesses make it to the second generation, and just 12 to 15 percent get passed on to a third.

Instead of staffing the business with the most qualified candidates, some parents use it as a safety net for grown children who may have failed elsewhere. That creates tension and reduces productivity among nonfamily personnel, who may feel they have limited ability to grow with the company, Cohn said.

Or siblings may feel they are held back because their parents don't want to appear guilty of nepotism or playing favorites.

Owners try to do whatever it takes to avoid family conflict, and invest in deals or tackle business decisions based on family wants and needs.

The setup may work as long as the founder is in charge and resolves conflict — that's often why families accept it, Cohn said.

"It doesn't become an issue until succession planning begins," he said.

A family-first approach also is likely to stymie growth because the best workers might not be in charge. Cohn recommends a business-first approach. Even if the business doesn't get passed on, it has a better chance of survival if the bottom line comes first, he said.

Such companies:

• Implement a formal policy for working at the company based on qualifications and experience.

• Base salary on performance and responsibility.

• Make employees earn leadership roles.

• Use business resources strategically for the good of the business.

• Believe outside skills and experience are more important than family-business longevity.

• Clearly state the boundaries between family and business and have a policy for addressing conflict.

• Include strong outside influences on the board to guide business objectives.

Before getting family involved, develop a plan so that everyone understands how the business will be run.

Early planning can help avoid any surprises or tension among children and other family members who want to join.

Changing an existing family-first business can be more difficult. Family-business planners or an attorney can be helpful in developing a plan for the transition.