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What's Really in Store for Family Firms?

September 18, 2008
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A family business can be very rewarding -- and challenging. Indeed, family businesses are a major contributor to the overall economy, employing more than 60 percent of the U.S. work force, according to the Family Firm Institute.

They do, however, face problems that are unknown at other companies, according to the Pennsylvania Institute of Certified Public Accountants. If you are involved in a family business or plan to start one, CPAs offer these tips to overcome some of these issues.

· Who's in charge: In most companies, it's clear who has the authority to make decisions in various departments and for the entire business. In a family business, the lines can be blurred: Parents sometimes overrule a child's decision, or siblings second-guess each other.

This lack of structure can lead to hard feelings and disruptions to the company's operations.

The best way to avoid these problems is to set up formal lines of responsibility, and stick to them. In this way, family members can communicate their expectations while maintaining family harmony with the same respect that staff in any business would expect from one another.

· Make room for outsiders. Family members bring a unique dedication to their business, but they often can't provide all the experience and knowledge needed.

A business cannot survive unless it chooses the very best person for each position, and sometimes that person may be an outsider.

When hiring outside the family is necessary, accord these professionals the same respect, compensation and opportunities given to relatives in the same position.

· Follow an exit plan. It can be very satisfying for a young person to learn the ropes of the family business, taking on more responsibility over the years, until finally he or she reaches executive status.

In many family businesses, however, the company founder is often the CEO and the parent of top managers. Those roles may become so intertwined that it can be difficult for him or her to retire gracefully and let the next generation take over.

That's a bad move. Younger family members can become so frustrated with their failure to advance that they may decide to leave the company, despite their devotion to the business and years of experience.

While family relationships last a lifetime, the chief executive's role should not. The company leader should commit to a certain date for retirement. That prepares everyone for an orderly transition, and reassures younger managers that advancement is possible.

· Create a succession plan. To formalize your company's future, create a written succession plan that describes how the transition to the next generation of leaders will be handled. The company leader should also have a will that sets forth who inherits his or her share of the enterprise, as well as other assets.

About 30 percent of family businesses last long enough to be taken over by a second generation, and only 12 percent make it to the fourth generation.

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