Some family businesses succeed. Some fizzle out. Others go out with a loud bang. We have all heard of the family businesses that didn’t make it. Something went wrong, trust broke down, relationships started to fracture, and in the worst case lawsuits broke out.
There are a variety of possible reasons why, but one of the typical reasons is money. When money is involved some people’s behavior can go sideways. When there is a lot of money, some people turn into Mr. Hyde. Sadly, money is a big contributor to family business failures, broken families, and unhappy Thanksgivings.
To be sure, money can be very seductive. I had the opportunity recently to present to the Tulane Family Business Center, and the topic decided upon for the three hour workshop was the “Effects of Wealth on the Family Business.” Those who work with family businesses know the power money can have in ripping apart a family business.
Money is certainly beneficial in life, but only to a point. At the bottom end of Maslow’s hierarchy money can buy you a lot of food, shelter, and security. But moving up the scale, not only does money become less important, it can be a hindrance to developing true love, self-esteem, and self-actualization.
Ted Klontz, Ph.D., specializes in the effects money has on the psyche. At presentations he asks a few folks to count a stack of one dollar bills. Afterwards he informs them that the mere act of counting money increases the level of oxytocin in body – the “feel good” hormone. Conversely, he will stand in front of the audience, whip out a $20 bill, say “watch this”, and proceed to tear it in half. The audience is always in shock, with some people gasping. (Note: It is a fake $20.) His point is to demonstrate people actually feel physical pain when seeing money destroyed.
Setting up a board
So what happens with these family businesses? Where do they go wrong, and what could be done?
The best action that a family business can take to ensure the longevity of the business is to have a board with some independent representation. Most all highly functioning and multi-generation family businesses have a board, and have folks on it who are qualified and have no conflict of interest. When issues arise, money or otherwise, a good unbiased opinion can get people back on track.
Compensation is also a tricky area. Many family business owners have a hard time paying their family members actual market value. Gifts and kind-hearted parental assistance get mixed up with salary. And then keeping equality among the children gets trickier. If the compensation does not end up out of whack for some members, then it ends up out of alignment in the other direction when everyone is paid the same, regardless of their role and contribution.
Then, once the parents are gone, the children are left with an unfair compensation system and the burden of trying to get it straight. Try telling your brother who is a lower level employee that you need to cut his pay and keep a good relationship – not an easy thing to do.
Passing the torch
Another mistake parents make is that in order to keep peace among their children, they remain at the helm much longer than they should. This results in poor communication with no one discussing the real issues. Hence, once Mom and Dad are gone, a battle for control ensues. Without the habit of good communication, legal action can result.
What makes matters worse is if the company is making significant profit, but there are few other assets outside the business. This forces the other siblings who might otherwise leave the business to be forced to stay in and fight for “their fair share”. Having life insurance can help here.
Finally, when there is significant wealth involved, prepare your kids. Teach them to differentiate between wants and needs, the benefits of delayed gratification, and that sometimes the answer is no. Make sure they have had a real job doing real work, understand saving and investing, and the importance of charitable giving – physical and monetary.
Henry Hutcheson is a nationally recognized family business speaker, author and consultant in Raleigh. He can be reached at Familybusinesscarolina.com.