The Essential Ingredients For a Successful Family Partnership

A successful family partnership in a family owned business requires three kinds of returns on their investment of time and money. Families must get an emotional return, a financial return, and a relationship return. Let’s look at why that’s necessary.

We’ve already discussed the concept of the best possible partner. The family, the board and the management all need to do their part for the business to thrive, and each has an equal influence on the successful and unsuccessful outcome of the business strategy.

A lot of families don’t think about the family’s role in the success of the company. They’ve made the family a second-class citizen. That means they’re not efficiently addressing any family-related risks that come up. In fact, they’re not even aware that conflict within the family poses any risk at all, but viewing it as a nuisance or mere unpleasantness. Conflict can represent an opportunity for growth and change, but for every opportunity there’s a counterpoint–the risk it represents.

When the family element of a successful family business is working well, the family is getting something back from the business. This encourages all of them to keep the needs of the business high on their priority list.

First, the family gets an emotional return when they feel connected to the business. They’re passionate about what the company does. They like that the company makes values-based decisions. Perhaps they like the company’s commitment to investing for the long term. They like the way that the company takes care of the employees and the community in a way that goes above and beyond many public companies. The business is buoyed by the family’s passion and engagement.

Second, the family’s financial return cannot be neglected. Of course, it can’t be the only return a family gets, but it’s a crucial part of keeping the family committed to the business. There has to be some recognition that the families and individuals have committed a portion of their assets to the company. Everybody knows family business can be challenging, and it may be tempting to invest in a public company instead, where you may even be getting a better return on your investment without as much hassle. But investing in a public company doesn’t provide an emotional return, other than the thrill of looking at your balance sheet. You’re not going to get the kind of passion family members get from being good stewards of the family business.

Lastly, there has to be some kind of relationship return. As the business moves into the fourth and fifth generation of family ownership, for example, relationships with your fellow owners may naturally become more distant. The business is what holds you together, and it has to be pleasant if not fun to be with your family members, or co-owners. If it’s a hostile environment, the strain can outweigh the benefits of the emotional and financial return. Remaining family owned can start to feel like it’s not worth it. Families don’t have to like each other, or mirror the kind of deep friendship you have with people you choose to spend time with. But you can have really rewarding relationships with family members who you wouldn’t have met or known without the company, especially as the family grows and becomes multi-generational. The business offers an opportunity to broaden and deepen your relationships with your extended family.

If the family has two out of the three–emotional and financial return but terrible relationships, for example—they usually have a solid foundation and a good reason for working on improving the third category.

I worked with a family that has a financial return and a relationship return, but they didn’t have the emotional return. There wasn’t a lot of connection between the family and the business, and the owners didn’t feel passionate about it. But because of their robust returns in the financial and relationship arenas, they were able to leverage those strengths to make changes. They tried new programming, organized more plant tours, and increased the amount of interaction between the management and family.

As long as you have two of the three ingredients for a successful partnership, it gives you time to work on the third. If you don’t work on it, the company will slip out from underneath you. Lacking in one crucial area erodes the family’s passion for the business and they don’t even see why it’s worth it. Why invest all these assets and get such a small return? Or why keep going to family meetings when all people do is fight? That’s the worst-case scenario.

If you can look at your family objectively and realize that you don’t have all three, what you can do is leverage the two that you have and really focus on the third. For example, if you don’t have good relationships, you can start putting together task forces to address whatever big issues are out there–whether its dividend policy, attendance requirements, transparency, financial reporting, and so on. By working on all of those things, you start building context for the relationships.

Relationships can be especially tricky. You can’t build relationships in a vacuum, especially in a company that is three, four or five generations of family members. The relationships have no context or meaning without the business. The business is the reason you need the relationships.

If you find that you’re missing two of the three, you have very little time. You have to take this 100% seriously if you decide you want to remain family owned, and address the problems with all hands on deck. When you only have one of the three ingredients, you are one crisis attention away from completely losing control of your company, having to sell at a reduced price, or falling prey to lawsuits.

That’s when you may have to look outside your family for help. Choose a good consultant to help your family work on the areas that need immediate attention.

Making sure the family is well compensated emotionally and financially, and that they have many satisfying relationships based on the business, will help ensure that they continue to be the best possible partner for the business. This is not an impossible list of ingredients to assemble, but it is vitally important for the continued happiness of the family and success of the business.

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