Thursday, October 05, 2006

Not good for the business . . . not good for the family

In our last entry, we addressed the issue of making non-economic family needs explicit in the decision making process. We did not, however, intend to advocate for their priority. This time let’s think about some of the dangers of putting “family considerations” first, implicitly or explicitly.

Most decisions to “put the family first,” above “strictly economic” criteria, are based on a belief that the fundamental role of family is to support its members in ways that are not strictly economic. Among the families we have worked with, that belief generally assumes an ongoing level of economic resources that allows the family to provide much of the other support. For that reason, decisions that ignore their economic consequences can be devastating.

This is particularly true when the family’s primary asset is an operating business. In most cases, the value of the business to the family is made up of two things: (1) the stream of cash it currently produces for the family and its members, and (2) the value of the business in the future, either as a generator of cash if the family continues to run it or as a source of assets for reinvestment if the family decides to sell it.

Family first decisions often appear reasonable if only its current cash value to the family is considered. But some of the same decisions can damage, or even destroy, the important long-term value of the asset.

Take for example the case of a family that decided that every child was entitled to a job in the business. Each child who wanted a job was given one, and none was subjected to the same hiring criteria or evaluation process that applied to non-family employees. This strategy was a less than successful for both the children and the business. The child who was qualified to work in the business never had the opportunity to test himself objectively and to develop a real understanding of his own skills or leadership capabilities. The children who were not qualified never discovered what talents they did have and found themselves uncomfortably isolated among their colleagues. Their presence in jobs for which they were not qualified also discouraged highly qualified employees from staying at the company.

Apathy and costs increased; quality and profits declined; and a real leadership vacuum developed. Everyone in the family had a title and a salary, but it became increasing clear that the business was entirely dependent on the skills and relationships of the founder. The family’s entire economic infrastructure was at risk if she died, became disabled, or simply decided to retire. The owner realized this risk but couldn’t identify its cause. In order to protect the family, she decided the time was right to sell the business. She was surprised when the bids she received were not much higher than current earnings, despite the premium prices that prevailed throughout its industry.

Since this was neither the family legacy nor the financial inheritance the owner intended to leave, she sought help. After some study, she decided that the right choice for the family was to run the business as well as the business could be run – with the right personnel and the right procedures, uniformly applied – and to help each of her children find training and experience appropriate to their individual skills. She would tell you that she learned the hard way a very important lesson: what’s good for the business is what’s best for the family.