Common mistakes that harm family businesses

As a family business consultant, Brown said, “I cannot tell you the number of families I have worked with where they have waited a lifetime for a son or daughter to come into the business, and now that they are there, they just cannot get along.”

Karen Lee

Managing Editor / Progressive Dairy

Email Karen Lee

If family businesses want to make changes, Brown encouraged the audience to start where they are at today, leaving the past in the past and moving forward from here to avoid future mistakes.

Here are a few of the common mistakes she mentioned and how they can be remedied.

We assume all genetic relationships equal good working relationships

“Just because you’ve been born to someone or raised together does not mean you can or should be working together,” Brown said.

Acceptance in a family should be unconditional; however, acceptance in a business is going to be conditional and not a birthright. Family businesses tend to tolerate behaviours that would not be allowed if the individual was working for anyone else.

“A family business is not a place to rehabilitate a family member,” Brown said. “If there is somebody in your family who is angry or addicted or lazy or arrogant or rude, don’t hire them; nobody else would.”

Family businesses must decide if they want to be a family-first business or a business-first family. Family-first businesses don’t want to rock the boat and oftentimes operate on hope, assumptions, habits and traditions.

Brown said that works if the business can be a hobby, but it doesn’t work for good decision-making, good leadership and improved profitability.

To be a business-first family does not demean the family or imply the business is more important than the family. “What it says is: We love and honour this family so much we’d better get the business right because, if not, at the end of the day you end up with neither family nor business,” Brown said.

If asset owners really want the business to continue after they are gone, Brown said she hopes everybody who wants to own the farm someday starts out as labour. They operate the junk equipment, live in the old house, scoop poop and work long hours.

“When you labour well, then you get to manage,” she said. Management starts in the area of the business the newcomer is good at doing. It could be agronomy, nutrition, animal health, marketing or money, to name a few.

As a manager, they must set goals and report on how that area of the business is doing. When they manage that well, they can be given another area of the farm to manage. Once managing multiple areas, they can become a leader in the operation.

“But at the pinnacle of your career, you senior generation, you get to become labour again,” she said. “You have brought them along so well, they followed you; they walked beside you, and now you get to follow them.”

Once the younger generation has worked their way up from labourer to manager to leader, they now want to have a mentor, one who has ridden the roller coaster, to advise them.

“If you really want this business to continue, you have just agreed to replace yourself. That’s the number one job of a leader is to replace him or herself,” Brown said.

Determining when the transition of assets will occur is another area for asset owners to consider.

“Is it while you are living because they have earned it or are buying in, or while the wise master is still there to guide, or is it at the reading of the will?” Brown asked.

Lastly, she said asset owners need to determine to whom they are going to transition the business. Consider who is trained, who has been vetted, who is trusted and who has the educational experience to lead a business.

“You’ve got to decide what is needed to lead a business before you decide who is going to lead,” Brown said. “Because if you don’t intentionally decide what is needed to lead the business before who, I will give you the default in agricultural family business: the oldest son, the one who has worked here the longest.”

“I did not say the one who has worked here the longest or the oldest son should not be the leader,” she continued. “I’m saying, ‘Do they meet the qualifications of what they need to lead?’”

We believe the business can financially support any and all family members who want to work together

If a family business welcomes everyone who wants to come back to the farm, but it doesn’t have enough money to do so, the business is in jeopardy.

When analyzing the financial situation of a farm, Brown said she starts by making sure the senior generation is financially secure.

As the ones who have built the business and put in the blood, sweat, tears and cheers, they should have the opportunity to have the house they have wanted or take the vacation they dreamed of having.

Make sure there is enough for future healthcare needs and the lifestyle of living they want in retirement.

Then, as people are brought into the operation, make sure it fits into the cash flow and not the net worth. They are going to want to be paid for what they do.

Make sure the financial resources are strong. Reports should be accurate and timely – not just the business’s annual tax return. “Do not bring somebody into a financial mess and expect them to fix it,” she said.

If there is someone from the next generation with a desire to come back to the farm, and it has been determined there is a need for them in the business, then that individual needs to present a business plan, in writing, of what it’s going to look like with he or she in the business.

“This is so they understand they are going to have to bring value to earn their keep. It’s not the parents’ job to expand to get big enough so everybody that wants to come back can come back,” Brown said.

Those wanting employment in the business should be able to answer these questions:

What benefits and anticipated results are they bringing to the operation?
Does the business really need them?
What is the cost to the business? This includes everything the business provides to the employee, such as salary, house, car, meat, milk, computer, etc.
Have they had a non-family boss for two to three years?
Are they still living at home?
Is their mother still doing their laundry?

Starting with a 12-month probationary period will allow both the employer and employee to determine if this is a good fit. If not, they can part ways but still remain as family.

“I want really good leaders hiring really good people. When we do, we operate as a business and get rid of all the emotional stuff that tends to pull us down along the way,” Brown said.

She added, “Hire family members well because it is hard to fire them.”

We presume a conversation is a contract

“People in family business lie,” she said. They say things like, “If you work hard, it will all be yours.” “I’m going to retire someday.” “You don’t have to worry about your brothers and sisters because they all have jobs.”

To eliminate risk, put the following in writing: meeting minutes, succession plan, provisions for off-farm siblings, job descriptions, financial statements, wills, risk protection/insurance policies, business plan, how much money can be spent before it has to be a group decision, compensation plan and benefits, and an exit strategy if there is more than one owner in the operation.

An exit strategy defines who will buy out the individual wanting to leave, how the assets will be appraised and the payment terms. “It doesn’t have to be cash on demand,” she said.

The exit strategy should be a legal document signed by all owners and their spouses. Brown advised the following statement be included: “This is binding to all heirs and future bequests.” In addition, each individual’s will should note that there is a pre-existing exit strategy.

Brown said, in her opinion, parents don’t owe their children a place in the family business. Recognizing these mistakes and avoiding or correcting them can help parents and their children know when and how a farm transition can occur to operate as a business-first family.