Family Business II: Setting Ground Rules

It's inevitable. Handing down a family business involves making tough decisions — from selecting who will carry out daily operations or mediate, and how, to the way in which family members sign on as you gauge their motives for doing so.

"Thirty percent of family businesses will survive the transition from founders to second generation. Only 12 percent will still be viable into a third generation,” says Paul Karofsky, 64, a grandfather of four who's been advising family businesses for 20-plus years at Transition Consulting Group, Inc. in Palm Beach Gardens, Fla., citing findings of the Family Firm Institute.

Those that hold regular meetings, do strategic planning, and draft entrance/exit policies, says Karofsky, are likeliest to thrive. “Pro-active families with eyes open to the major risks — failed leadership, unresolved conflicts, lack of agreement on goals — can avoid pitfalls." Missteps can muddy the management waters or worse, take a toll on production and profitability. Consider these pointers while preparing the next generation for the task at hand.

Before You Embrace Them, Send Them Away

Before joining Russ & Daughters, a New York City food shop dating back to 1914, fourth-generation family member Niki Russ Federman graduated from college, held several jobs, even lived in France and Japan for a while. Her cousin, Joshua Russ Tupper, also fourth generation, was trained as a civil engineer and accepted professional positions elsewhere before becoming a Russ & Daughters employee. "It taught me how to deal with personnel issues," he says.

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They followed the lead of Mark Russ Federman, who, with his wife, has managed the business for 30 years. Mark practiced as an attorney at an uptown Manhattan law firm before taking the reins at Russ & Daughters.

"My parents' concept was never that they'd pass the business on to the next generation. Their plan was to work hard, and send us to professional school, so we wouldn't have to." He laughs, adding, "People ask me how I got the fourth generation interested in running the business. I say, 'pretend you don't want them.' That seems to have worked!'"

It's good practice to offer teenage grandchildren internships at the family company during summer vacations, says Ted Clark, director of The Center for Family Business at Northeastern University in Boston. But trying out jobs with other companies, he adds, can help them determine whether they'd be happy and satisfied committing to the family. Encouraging them to explore other opportunities may also alleviate any pressure or obligation they may feel, real or imagined, to link arms with the family.

Avoid Handouts & Entitlement

There's no denying that an already-established business in good working order can provide a comfortable lifestyle for young people. As grandparents in the company, make it clear that even though your grandchildren are lucky to have this foundation for a career, there’s no such thing as entitlement. They have to earn their positions and paychecks the same as everyone else, says Karofsky, who worked in his family's wallpaper business for 22 years before selling it.

A family should first consider whether there is an existing business need and if there is not, if a position will be created. Where there is a pre-existing need, it may be better to have a grandchild formally apply to ensure that he or she is qualified for the position, says Karofsky.

"It's not folklore that some family members involved in a family business feel a sense of entitlement. That's very real," says Northeastern University's Clark. By only bringing a family member on board when a position requires filling, adds Clark, you can avoid placing a burden on the business economically — or on family members emotionally if the business unravels.

"This country was built on competition. That's what makes businesses thrive," he says. "If grandchildren are given jobs because of their last name, what gives you the idea that they'll do a good job? For the sake of the business, it's better to send checks and let them stay home."

According to Karofsky, though, creating a position doesn’t necessarily create a problem if that's what the family wants to do. It depends on what the position is and how it fits into the business as a whole. The main goal is for your grandchildren to see joining the business as an opportunity, not an entitlement or obligation. Carving out a lower-level position poses no risk to the business. Inventing a senior-management position might. "Only a super-qualified family member whose presence will significantly add to or grow the business should be entering at, or near, the top," says Karofsky.

Craft an Entrance/Exit Process

One way to help a grandchild appreciate his or her first official position with the family business can be to establish an entrance/exit process. If no one before you has written down or explained the procedure for joining the business, then you and your loved ones should make this a top priority.

The process need not be drawn-out or formal. Some families may require relatives to obtain a college degree or get outside work experience before being hired. M.B.A. degrees are becoming more common among relatives being groomed to take over management roles. (Besides devoting entire centers to helping family businesses accomplish goals, schools such as Massachusetts-based Babson College offer targeted courses on family enterprise.) Others may require that a one-on-one discussion take place between the family member managing the business and the grandchild entering the fold to hit home the risks, rewards, and level of commitment expected.

Yet, family business owner Kurt Schmidt, president of St. Louis-based A.E. Schmidt Billiard Co., says overly-intricate entrance plans, which may look good on paper, are hogwash. "Life changes all the time. Most parents and grandparents don't have the resolve to carry this process through. Their offspring pull on the heartstrings — and that's a powerful force," says Schmidt, who admits he'd like to see his business continue in the future.

His approach? He asks family members seeking permanent jobs to buy into the company — with, he stresses, their own money. "This is the only way I know to bring some fairness to the process," says Schmidt, "and to separate the real players from the pretenders."