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Many of the world’s largest companies started as, and remain, family-owned enterprises. Family businesses generate a significant portion of the U.S. GDP. On top of the challenges that all other companies deal with, they need to survive transitions to subsequent generations, melding family with “outsiders” to run the business, and perhaps some drama. If you’re a family business owner or want to be, we recommend that you keep the following principles in mind. Our experience in working with family businesses over the years has shown that applying these principles can help you avoid pitfalls and create a lasting legacy.

Let Family Members Opt for the Business

When you hire from outside the family, you look for skills, cultural fit, and a genuine interest in what your company does. If your children, siblings, or in-laws aren’t drawn to the business, let them go where their passions take them. Everyone will be happier and more productive, and your dreams of success for your child just might come true somewhere else. On the flip side, avoid being the employer of last resort for your family. No one wants to celebrate the holidays with an incompetent relative who just bungled a key customer relationship.

Learn more about getting started with a customized, no-cost financial analysis and model for sustainable growth. Learn More

Encourage the Next Generation to Get Outside Experience First

Even if it’s in a different industry, working somewhere else affords real-world perspective and professional development. Then the family member can join the business better prepared to appreciate it and add value. Doug Homet, a business consultant and former CFO of CALPLY, says, “While it isn’t absolutely necessary, family members who come in with experience are generally more engaged and successful. They bring ideas and skills that they might not otherwise have developed.” Either way, once they’re on board, treat them as bona fide members of the team.

Anthony Nardo, CFO of Reborn Cabinets talks about growing his family business

Recognize When to Hire from Outside the Family

If you’re serious about building a successful company, always keep sight of the “business” part of “family business”. Do your level best to have the right people in the right places. Homet recalls a successful company led by three talented brothers. “As the business grew, they agreed that they needed a new CEO to guide the company. They also saw that none of them was the right person for the job, so they went outside. It was the right decision, and the company has done extremely well because of it.”

Blood is Thicker than Water, But Keep It from Getting Too Thick

Finding and retaining talented employees is critical. They can tell when decisions are made for family first and the business second. If they see that poor performance is OK for certain people, or that promotions are based on relationship rather than merit, they’ll move on to a company that offers a career path for achievers and a culture of performance. In the end, it’s your business. Within reason, you can run it the way you choose. But if you want to keep good people who aren’t family members, run it like you mean it.

Think Positive by Thinking Negatively

As your family looks ahead longer-term to a possible sale of the business, it’s critical to keep your eye on different financial scenarios that will change the company’s value and exit strategy. Say, for example, the family is thinking about selling the business in 4-5 years, but the firm’s growth suddenly hits a rough spot in Year 2 or 3. You need a modeling tool, and most likely, one-on-one assistance to map out the potential impacts and exit possibilities. And then re-visit the model each year so everyone – family members working inside the business AND the ones outside, who may have extraordinary expectations about their share of the business – is up-to-speed on what will really be ‘at the end of the rainbow’. In other words, you have to think proactively and positively to plan for the possible negatives that could change your family’s future drastically.

Run the Business Better

You could do that modeling every year on your own with a spreadsheet. Or you could get some help from Pacific Mercantile Bank and our Horizon Analytics team. Building an enterprise that blends business and family takes wisdom and foresight. It can also be profoundly rewarding. Done right, it elevates everyone involved. At Pacific Mercantile Bank, we specialize in helping companies succeed. You’ll be surprised at how much it doesn’t cost to gain some confidence in your future plans.

Learn more about getting started with a customized, no-cost financial analysis and model for sustainable growth. Learn More

To learn more about our Horizon Analytics methodology and hear from our Clients how they’ve found it to be a true difference-maker, click here

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