It may come as a surprise to you, but a well-functioning family business can outperform a Fortune 500 company. That’s the good news. The bad news is that a dysfunctional family business can feel a lot like a train wreck.
Why do some family businesses flourish while others implode? To understand the reason, you have to grasp the concept of the two systems that exist within any family business: The Family System and the Business System.
Tom Hubler, a long-time expert in the family business realm and part of the LaManna Alliance, published this fantastic comparison between the two systems back in the late 80s. Thirty years later, it’s as timeless as ever. Here is Tom’s description of the two systems:
The Family System
The family system is emotion-based. The people in the system are bound together by their family emotional ties. (Being “bound together” can result from either positive or negative feelings; the opposite of being “bound together” is not repulsion but genuine detachment.)
The family system is oriented inward towards the security and nurturance of its members. The family system places a high value on loyalty and protection of kin. The family system operates to minimize change in the status quo. It is designed to resist disturbance of the balance and integrity of the system.
The Business System
The business system is task-based. It is comprised of people who are organized around their common interest in the work product of the system. The business system is oriented outward toward production of goods and services. It places a high value on the competency and productivity of its members.
The business system operates to exploit change in the interest of growth and survival. It is designed to understand and cope with ever-present and unavoidable change.
That’s sound pretty straightforward, right? Now let’s get to the meat of the matter: Why these two systems are constantly at odds with each other.
Comparison of the Two Systems
The family system is emotion-based while the business system is task-based. The two systems are fueled by two different primary types of energy.
The family system is oriented inward toward nurturance while the business system is oriented outward towards production. Consequently, the focus of the two systems is quite different.
The family system resists change while the business system exploits change. As a result, each of the systems acts and reacts much
differently to the ongoing change that exists in the external environment.
Interaction Between the Two Systems
Some overlap between the two systems is natural and desirable. For example, the fact that some family members are in the business by virtue of their family membership represents a minimal unavoidable overlap between the two systems.
Both systems often become dysfunctional when the overlap between the two is so great that they lose their distinct qualities. This situation frequently undermines both family harmony and operation of the business.
The Yin and the Yang of Family Business
As you can see, the two systems have completely different orientation. Or, perhaps, more accurately, I like to think of them as almost the yin and the yang, in which the opposites attract, or complement each other.
Take a look: The family system does not want change. It’s oriented toward protection and loyalty. The more change occurs, the more the family dynamic gets upset. Roles get blurred, and that sense of security erodes. That can be tough on a family. On the other hand, the business system thrives on change – it has to change in order to grow. To succeed, a business must adapt, innovate and reinvent. Look at the businesses that survived the last recession: Most of them look very different than pre-2008.
Remember, the culture the family system brings to a business is the secret sauce that can make an organization really take off. Think about a loving, cohesive family. They seem to have a power that transcends. It’s almost spiritual. However, that family system is not designed for change. And, as we know, the business world is always about change. Especially in tough times, when the need to evolve is critical for a business’s success. As a result, problems emerge when the emotional family system resists the cold, hard business system.
We call this an overlap of the two systems, and it can destroy a business and erode a family if left untended. Yet it’s hard to prevent the overlap. Hubler shared a particularly gut-wrenching example of this.
The owner of a prominent family business had a son who was under-performing as an employee. The son had struggled through several poor job performances, and finally, it was determined that he needed to be let go.
The father invited him over to his house, and said the following: “Son, you’ve had several poor performance reviews, and I’ve talked to you about this repeatedly. I’m afraid I have to let you go.”
He cleared his throat and continued: “Now I’m going to take my owner’s hat off, put my father’s hat on, and say that I heard you lost your job, and that I feel terrible for you and I want to do what I can to help you.”
The story illustrates a family business owner’s clear understanding of the two systems, and how they must remain as separated as possible.
How to Keep the Systems From Overlapping
How do you prevent this type of overlap? Well, think about the solar system. It is a system with a series of rules and guidelines. If you take a planet out of that system, it can have a profound effect on the rest of the system. A family business is no different. You need to understand how that system works.
In many family operations, there are a series of implicit rules you can feel simmering under the surface. These unspoken “way it’s always been” procedures are things that no one in the family wants to touch.
To be successful, you need to make rules explicit, so that the consequences are known up front and roles are clear. Make sure they’re tied to data and metrics, and that everyone is on the same page as to why these exist. That way the two systems operate in harmony. The business thrives, and the family lives happily ever after.
Specifically, there are a number of planning tools that can help you make those rules explicit. They include:
1. Cash-Flow Analysis – You’re guaranteed to have overlap in your systems if you can’t pinpoint what areas of the business are weak and which are strong. A Cash-Flow Analysis can truly help you understand how your business is really doing. It also will paint a clear picture of what your financials will really allow you to do next.
2. Business Plan – Most families lapse into dysfunction when there’s no formalized Business Plan in place. Roles need to be clarified; everyone needs to understand what the expectations are, and what they need to do. A sound Business Plan can provide that definition.
3. Family Plan – Okay, we’ve focused heavily on the business system. But the family system needs structure, too. What traditions are important? How often will you have get-togethers? It’s extremely important to define how you will maintain these important family relationships.
There are also a few essential plans for when the owner of the business moves on that should not be overlooked:
1. Ownership Plan - If the leader of the business/family is planning on retiring or moving into a different role, a leadership transition requires an Ownership Plan. This includes a Succession Plan, Estate Plan, and clearly establishing governance once the owner has either retired or assumed a new post within the family.
2. Management Leadership Plan - If the business owner retires, the family needs to establish who will run the company, and the future role of the owner. A Management Leadership Plan details the new management structure.
I’d like to add one important element to the two systems: Perspective. The two systems I’ve illustrated are a critical part of a family business, but keep in mind the over-arching focus of all your endeavors. You must remember that the family business’s ultimate goal is satisfying customers and meeting the demands of the market.
A business is not a surrogate parent; it doesn’t exist to provide unconditional love and financial support to its offspring. The business will continue, and the family too, if you remember whom you are ultimately serving: The customer. As Peter Drucker once said, “Both the business and the family will survive and do well only if the family serves the business. Neither will do well if the business is run to serve the family.”
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at firstname.lastname@example.org.