August 17, 2015
Know How

Know risks and mitigate them: 5 failures that can impact family businesses

In the classic science fiction novel "Dune," a master assassin named Thufir Hawat reminds Paul, the story's hero, "The first step in avoiding a trap is to know of its existence."

The same is true of risks to family businesses: The first step in avoiding risk is to acknowledge its existence. This is harder than it seems, and may indeed appear counterintuitive when it's viewed out of context. Family businesses experience risk on several levels, but many failures and shortcomings can be sidestepped by avoiding these five common mistakes.

1. Incomplete documentation. In a family business, procedures often evolve over time as a result of experience, and are adjusted as needed without notation or standardization of those protocols. If your habits, routines or methodology are never in writing, the result is a lot of meaningless time and energy wasted in re-establishing a good working relationship with customers, vendors, employees and family any time business must be carried out by a surrogate.

2. Inconsistent communication. Formal and detailed communications between management and the owners (even when they're one and the same) may seem inconvenient, but it provides any substitute who is stepping into your shoes as manager a clear understanding of your choices, and it will set the expectation of how and when to communicate with your family. By providing reasoning and instruction, you're empowering your family and employees to direct their efforts toward one goal that remains consistent across all channels.

3. Incompatible financial interests. Family connections in a business can cause complications when financial and personal goals are not aligned. Emotional ties can derail plans as interests compete for priority status. A unified vision with all family members striving for compatible financial goals results in consistent progress toward achieving your vision and exceeding expectations without relinquishing control of the company or its assets.

4. "Lone wolf" syndrome. Owners commit to being an active part of their social and business communities, and strong community ties are integral to the prolonged success of a family business. Creating these lasting relationships drives new and repeat customers, but can be deterred through self-imposed isolation or alienation of people important to the business.

5. Lack of an advisory board. An advisory board provides a business leader with consistent recommendations and acts as a repository for institutional knowledge. Should something unexpected happen to the CEO, a qualified advisory board would be able to advise the successor, maintaining the viability of the business and facilitating a seamless transition.

A family business can create a legacy that will support future generations or leave a burden of financial and managerial chaos, depending on how they're prepared. Avoiding these pitfalls is the first step toward guaranteeing that your investment never falls victim to unnecessary risk.

Matthew Erskine is owner and operator of The Erskine Co., of Worcester, which specializes in estate, tax, risk and succession planning for family businesses. Contact him at M.Erskine@ErskineCo.com.

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