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A Formula for Thoughtful Decision-Making in a Family Business

Posted on: October 1st, 2020

A Formula for Thoughtful Decision-Making in a Family Business

Conflict has sunk more than a few family businesses over time. To avoid it as much as possible—and navigate it when it inevitably rears its head—owners of family businesses need to adopt a thoughtful, calculated approach to decision-making.

To see why, consider one story of a patriarch who runs a company worth north of $300 million. Seeking to involve his sons—both of whom were senior managers at other firms—at a high level, he offered them senior executive positions in the company and positions on the firm’s governing committee. They accepted.

But problems soon arose as the sons’ expectations and interests clashed with the patriarch’s and with each other’s. The three family members began subtly sabotaging each other’s efforts, resulting in the business suffering weaker financial performance. Within a few years, it was outright war—with the sons openly fighting with their father, each other and the company’s top brass.

Ultimately, the situation became untenable. The father, after reaffirming his love for his children and his deep concern for their welfare and future, banished them from the business. They were no longer involved in any way with the management of assets or any other aspect of running the operation.

The result: In less than a year, under the sole direction of the patriarch, the company was once again doing extremely well. But the rough road could have been avoided with some thoughtful planning and expectation-setting in advance.

Being thoughtful

There are many ways to handle conflicts among family members involved in a business. For some successful entrepreneurs, interventions led by family business coaches are successful. Different forms of conflict management consulting services can be used. The patriarch in the example above obviously went in a different direction.

But whatever the specific situation, if you want to have a very successful family business, the answer is often taking a calculated approach to decision-making.

You need to look at business decisions through the lens of your family values and beliefs as well as your obligations (as you see them). To accomplish this, it is very important that you be able to step back and appraise situations, people and other factors nonjudgmentally to derive a workable solution.

Values and economics

You have to take a lot into account when making decisions affecting your family, your wealth and your business—especially when they’re all tied together. What’s more, the emotional connections with family members can override your best financial and strategic business abilities.

The key to thoughtful decision-making is to understand how your values impact your decision-making concerning your family business along with your ability to consider the economics of a situation—and to then balance values with financial implications.

The following formula puts thoughtful decision-making into perspective:

Family Values + Calculated Economics = Thoughtful Decision-Making

Let’s look at each component in more detail.

1. Family values

There are some classic family business concerns that successful entrepreneurs often experience—such as balancing family priorities, issues and interests with business considerations. Family values and intent are typically built into the expectations for the company and those running it.

Certainly, a core asset of family businesses is very often the family itself—and children can be great sources of strength and creativity. However, there are times when family bonds can prove detrimental to the success of the company and the harmony of the family. If these matters are not capably dealt with, the business and the family will continue to suffer.

We often see two scenarios in which children can be detrimental to the success of a business.

  • Well-intentioned but dysfunctional. Most of the time, when children are causing problems in a family business, they’re not actually trying to do so. We generally find that family members intend to be positive and helpful—they’re not seeking to create family business strife.

Entrepreneurs can usually identify family members who are dragging down the business. Typically, these family members are not deceptive or conniving but are simply out of their league.

  • Bad seeds. Bad seeds are family members—often children and other eventual heirs—who, in a Machiavellian manner, exploit the business for personal gain to the detriment of other family members. Although subterfuge is regularly involved, in time everyone knows what is going on—and a great deal of acrimony tends to ensue. Most times, the business seriously suffers as the family tries to hash out the conflicts.

Even though everyone would like the family to work together in a supportive and constructive way, that just does not happen in situations where there are bad seeds. These family members are very self-absorbed and commonly feel entitled. Along the same lines, they habitually expect preferential treatment. Consequently, they tend to act in ways that damage relationships and the functioning of the company.

Further complicating these situations, most entrepreneurs and other family members have a hard time reining in family members who are disruptive and oppressive. For instance, parents generally have a hard time effectively punishing children for their negative behavior.

Important: Entrepreneurs need to recognize that even where their values are not inhibiting the optimal financial performance of the family business, they can still make poor choices. Many entrepreneurs do not think through the financial implications of many of their decisions—which almost always leads to trouble.

2. Calculated economics

There are a number of approaches to making financially smarter decisions in a family business. One of the most effective, of course, is to run the numbers. It is logical to write pro formas—formal financial statements—for each venture within your firm. For each major initiative, you can be well-served by developing a set of financials and using these calculations to help drive and benchmark the endeavor.

In this context, pro formas are similar to military strategies. Before embarking on any initiative, a thoughtful leader will explore all of his or her options and possible outcomes, so an informed decision can be made when changes in direction are inevitably necessary. Very few things unfold exactly as anticipated, and running the numbers allows you to better adapt on the fly to new circumstances and navigate turbulence.

Pro formas provide entrepreneurs with a clear understanding of the financial aspects of prospective decisions. They might project over several quarters key metrics such as (but not limited to):

  • Revenue (and each source)
  • Unit sales
  • Cost per unit
  • Rent, labor, payroll and other costs
  • Gross margins
  • Capitalized vs. variable expenses

Combining these financial assessments with your values results in thoughtful decisions.

Balancing act

Ultimately, family business owners have to strike the right balance between their various values and the need to be fiscally prudent and smart. If these are misaligned, bad results can occur. Put too much weight on values at the expense of economics and the business might fail to thrive—or even survive. Overemphasize money and you might find that family members become disillusioned or outright hostile about the way the business is being run. And if that gets bad enough, it can hurt the company’s fortunes.

But find that sweet spot and you’ll likely position your family business for success in the years and decades to come—and avoid the type of conflict that can sink even strong companies.

This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

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