10 Rules for Family-Run Businesses

Family businesses can be a blessing or a disaster. The root of a well-run family business is grounded in treating it like a business, not as an extension of the family. Here are 10 guidelines for successful family businesses practice.

1. Have the family member work somewhere else first.
It is not absolutely necessary that it be in an insurance company or agency, although this would be helpful. They must prove to themselves, to you, and to the other employees that they can succeed on their own. It is also far healthier for the business to have them come in with some fresh ideas and training.

2. Do not expect more or less of them than you would of any other employees.
Family members might try harder or they might not try at all. They need motivation from the boss, just like any other employee. Apply all agency rules to family members and adhere strictly to performance evaluations and salary administration. Give family members responsibility and authority as they become ready for it. Give them enough rope to prove themselves and don’t second-guess their decisions within the parameters of authority that you have granted. This is difficult to do with any employee and much more troublesome with family members, especially children. Avoid the two extremes — either cutting them too much slack or riding them harder than other employees.

3. Do not create a job for a family member.
Either you have an opening for which they qualify, or you do not. If there is no suitable opening, wait until you need to hire someone and/or they have the appropriate qualifications.

4. Keep family and business issues separate.
Never discuss family matters in front of other people in the agency. Use the family members name and try not to call each other dad, mom, or junior during business hours. Do everything that you can to de-emphasize the family relationship when around other employees. Don’t discuss business at family gatherings, since this can put a strain on personal relationships.

5. Keep open lines of communication.
Let family members know your perpetuation plans so that they know what you expect from them long before they are old enough to come into the agency. Don’t expect them to read your mind. Pay attention to any child that might resent all the time in the past that was spent with the agency instead of them. Passive aggressive behavior by a jilted child can be very destructive to the business. Also, rivalries between siblings can also wreak havoc on an otherwise successful business. If necessary, heal old wounds with the help of professional counseling.

6. Never leave the agency to two people (family members or not) on the basis of 50/50 ownership.
The buck always has to stop some place. And two siblings can already have some built-in differences of opinion that make decisions more difficult to handle effectively. It can work in some cases, but these are the exceptions. As a minimum, put one outside person on the board of directors as a deciding vote.

7. If possible, develop an organizational chart that has family members reporting to people other than you or other family employees.
Make sure that the other employees understand their relation to the family members and to whom they are responsible. Just because someone has the same last name of the owner does not mean that they have the same level of authority and everyone needs to know this. Unclear relationships can cause confusion and dissension and can cost the agency good employees.

8. Create a board of directors that includes non-family members.
When you need advice on dealing with sticky issues, its important to have someone involved without familial emotional attachments. Use outside professionals, such as CPAs, attorneys, or consultants. Also consider joining a mastermind group of other business owners.

9. Make family members pay for ownership, even if it is at a discount.
Most people do not appreciate something they got for free, compared to something they had to earn to obtain. The concept is that if they pay for it, or have to sacrifice something for it, they will value it more and do a better job of running the agency. In a similar fashion, children who are not associated with the agency should not be owners, since they might not appreciate what it takes to run the business. Also, keep the IRS in mind. You must properly value the ownership that you turn over to family members either through gifts or cash transactions.

10. Make sure all participating family members agree to these guidelines.
There is no sense in having guidelines or rules if no one agrees to them or if the rules are sporadically implemented. All family members must buy-in to these “rules” for the family business or they cannot be a part of it. This is where tough love comes into play. Children do best when the rules are clearly spelled out and consistently followed. The new motto needs to be “it’s nothing personal, it’s just business.”