Almost 95% of all businesses can be characterized as family businesses, yet we rarely hear about them in comparison to public corporations. Why is this and what is so intriguing about them? It is time to shed some light on the often overlooked world of family companies.
IPO. Initial Public Offerings. We are all familiar with this terminology in some form or another. We often take it to be synonymous with the pinnacle of success in the business world. After all, what greater crowning achievement could there be than to bring a young growing company to public markets? On any given day, the vast majority of business news and headlines will be about public corporations. However, most people will never set foot in one of these corporations. Their working lives will instead consist of experiences in family companies. Concurrently, many owners of these very companies look at majority public listings as a hindrance to their long-term vision and instead seek to keep the company independent long enough to pass on to the next generation for sustained growth. This phenomenon is too often given little attention even at top business schools. The time has come to look behind the veil and shed some light on the intriguing (yet often overlooked) world of family companies.
Family businesses in general
Generally speaking, family businesses are the most common form of existing enterprises. In fact, almost 95% of all businesses can be characterized as family businesses depending on what kind of definition will be applied. It is therefore only right to assume that family businesses play a fundamental role by providing employment for all industries. In the German economy, for example, about 65% of all employees serve in a small, medium or large family business.
Only the government and church offer similar numbers of jobs to the community. Having these numbers in mind it is even more surprising that there are only a few guidelines and standards on the peculiarities of working for family businesses.
Anecdotal evidence suggests that family businesses are warm hearted, a bit unstructured but hard working and with low hierarchies. It is not uncommon that long time employees can become good friends and achieve a status as a semi family member.
So what in particular is the attraction of family businesses?
Most people will spend the majority of their working lives at family companies, yet even the top business schools pay little attention to the uniqueness of these businesses.
Joining a family business
There are many ways to join a family business, sometimes one knows a family member personally, other times there can be a traditional hiring process. Whatever the way is, it is important to remember that most family businesses have their own rules and procedures depending on size. Hierarchies tend to be flat, with the typical patriarch or head of family as an exception. The best way to start your professional life in a family business is to introduce yourself to your colleagues and to all family members involved and to understand the roles and responsibilities. Learn about the written and unwritten rules and believe me there will be an abundance of unwritten ones. It is best to ask some long-time colleagues about the common practices. These unwritten rules often make it difficult to understand the procedures and how decision making actually works. Understanding them is critical to being able to get things done.
As a matter of fact, many family businesses are amazingly good at what they are doing, playing the role of hidden champions, meaning that they are the forerunners of their industries but most of them are not considered very democratic. Decision-making is often a fast, unstructured top-down procedure. Often, only the closest family members, regardless of their actual position are involved. It is not uncommon that decisions are made during lunch or dinner and without the relevant non-family members being involved. The owning family is not doing that with bad intentions or to humiliate non-family members. They are doing it because they always did it this way, often not even noticing that leaving out other employees might annoy them.
On the other hand, one of the key advantages of family businesses is this very quick decision-making process, which requires a minimum of people being involved. Due to the private atmosphere (lunch, dinner, bathroom) where most important decisions are made, employees are rarely involved, but other family members who might not even have a working contract (wives, young children, in-laws) attend these informal gatherings and might add their opinions. It is therefore important to keep in mind that the group of key decision-makers might be much larger than the protocol or organizational diagram suggests.
In order to have success and get things done it is critical to get a grasp of the many unwritten rules. Often times, this will involve coming to terms with the fact that the decision making process can be undemocratic.
These informal gatherings and additional rights may be considered nepotism in practice. However, nepotism in family-owned businesses does not automatically have to be a bad thing. Family members are granted exclusive rights that are not necessarily met by abilities, experience, age or similar, but they are also confronted with high expectations, low salaries and quite often a minimum of gratitude.
Again, what is it like to join a family business? Well, be aware that you might become part of a new working family, a strong brotherhood, but most likely you will never join the true inner circle. This has advantages and disadvantages. Family businesses are very flexible when it comes to working times, salary, rules, and procedures. If you want to test something out or if you are willing to take over more responsibilities, you will get all the support you need. There will be no boundaries, procedures or static hierarchies as in big corporations. There will be other rules and values applied and most family businesses are quite rewarding employers, not only in a financial sense but especially on a human basis.
These special rules may be irritating for the normal employee, but they easily become an even bigger challenge at the top management level. Luckily, there are ways to deal with these situations and to overcome the challenges.
Joining the family business on the management level
On the management level not being part of the family while coping with often non-transparent decision-making processes becomes way more challenging. It needs a large amount of training, education and goodwill to make things work, but if it does it is a rewarding success.
Why do families decide for external management in the first place? Well, there are many good reasons: for example, external management might offer knowledge or resources not available within the family. The absence of willing or capable successors might be another reason. Not every family member needs to find its own future within the parental operation. In addition, families might decide to stay out of the daily operations in order to avoid family fraud and conflict. Over the last decades many family-owned businesses have grown to considerable sizes and the workload and requirements might often becomes too big for one or two family members, therefore it might be worth considering opening up for professional external management.
Whatever the reason is, the family needs to make up its mind about what form of external management it chooses. Shall the future management consist of non-family members only, or shall there be a mixture of family members and non-family management working next to each other? Both strategies are legitimate approaches with their own advantages and disadvantages.
One of the major challenges for external management in family businesses is finding one's own role in a new system. It is key to avoid conflicts with the owning family by fulfilling the different and sometimes contradicting expectations.
Many family businesses do not have a long external management tradition and need to learn how to cope with this new situation. Therefore, do not be surprised if the guidance you receive is basic to say the least.
External managers should opt for a proactive approach when joining a family business, meaning they should ask their way through, especially about roles and responsibilities. Many duties and customs will be based on tradition rather than modern lean and effective management. It might be your duty as a young whippersnapper to question these procedures without neglecting the history and success they are based on. In addition, make sure to avoid conflicts about matters of representation and public awareness. Most families are very proud of their company’s history, of the products and of the services they produce. It is therefore only right that they also represent their business to external parties. There might be exceptions as some families are more exclusive than others, but in general the owning family wants to fulfill this duty on their own. It is important to clarify who is obliged to fulfill certain tasks or not and these duties might not always be clear or represented on a diagram.
External managers should opt for a proactive approach when joining, meaning they should ask their way through, especially about roles and responsibilities. It might be your duty as a young whippersnapper to question these procedures without neglecting the history and success they are based on.
What family businesses can do to improve partnership
Owning families on the other hand need to understand how difficult it is for external employees to join their workforce. Traditions, rules and non-transparency are only some of the challenges new colleagues must overcome. It is the family’s duty to support its workforce wherever they can and most importantly keep family conflicts and frauds out of the business. At least to our awareness there are almost no business families who do not have their own specific private family problems. This is okay as long as they manage to keep their private problems out of business. A professional family governance, including a family constitution, is worth the effort and reduces potential conflicts to a minimum. The last thing employees deserve is becoming part of internal family conflicts.
The above-mentioned family constitution is a powerful tool that we really like to apply with the business families we accompany as a professional consultants. The process of working on such a constitution gives the opportunity to address all major fields of potential conflicts and to gain further insights and to open discussions and presenting solutions to the advocated problems eventually.
In our opinion every professional business family should have their own family constitution while there is also the family’s constitutions counterpart which we call the “shareholder positioning paper”.
Whereas the family constitution targets the owning family and is a non-legal document clarifying all family matters, the shareholder's positioning paper targets the management and deals with the differentiating roles and interest between management and owning family. In this document the family proclaims it's vision about the family business. What expectation it has towards its management in terms of ROI (Return of Investment), growth and risk, but also what additional goals need to be fulfilled. In a perfect world these goals are being linked with the variable remuneration of the external management employed.
There are many large and mid-sized family businesses we guided over the last few years to their own and personal shareholders positioning paper. Below are some examples that demonstrate its superiority and good practice on an everyday base.
Fressnapf: Toeller family
Uvex: Winter family
Dockweiler: Fiebig family
Samhammer: Samhammer family
Joining a family business as a non-family member is a challenge but definitely a rewarding one. Family businesses tend to be generous with low hierarchies and lots of potential for learning and taking over responsibilities. On the other hand, family businesses tend to be unstructured and non-transparent with many unwritten rules and traditions often difficult to understand for new members.
Both sides, family and workforce, need to understand the specialities and challenges involved and need to fulfill their part to make things work.
There are certain tools like the family constitution and a professional shareholders positioning paper which are making life easier and help document the different roles and expectations. This might be clear to one part of the team but not for everyone being involved.
Over 90% of all businesses worldwide are considered family businesses. There are small and there are large ones dominating almost every industry. It is therefore very likely that you will be working for one sooner or later. If so, we hope the text above helps you to fit in and to make the most out of it. If you do have certain questions, please do not hesitate to contact us and we will be more than happy to do our utmost to answer all your questions from our own personal experience as business family members and loyal employees to another great family business.
Prof. Dr. Arnold Weissman has been advising tal&dev since its inception. In 1987 he founded the Weissman Gruppe in Nuremberg, Germany which is a leading management consultancy dedicated to advising family firms in Germany, Austria, Switzerland and Italy. Additionally Arnold has a passion for bringing his learnings to the forefront of academia while also mentoring and advising high-growth startups.
July 5, 2021