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Steps to avoid entrapment in the family business

65% of family businesses have two or more generations working in them. Therefore, it is vital to ensure that the older generation avoids entrapping the younger family members in the business.

There are numerous factors that create barriers to success and conflict between individuals in family business and they include:

– The need to balance family concerns and business interests.

– Adequate compensation of family members working in the business.

– The ability of the business to generate adequate financial returns to support the family.

– The level of trust in the ability to of potential successors to run the business.

In my experience, the issue that causes the greatest level of conflict – and which is perhaps the greatest barrier to success – is the third issue. . . generating adequate financial returns to support the family or families in most instances. When this occurs one of the common results is a symptom that we at Business By Design define as “entrapment”.

Entrapment in a family business occurs when the older generation employs family members in the business at lower than market rates on a promise of that one day the family business will be theirs.

Normally this occurs in under performing businesses that are unable to financially support multiple generations or have not generated sufficient returns to enable the older generations to step away in the comfort that they have sufficient “non-business” assets to retire.

Unfortunately, in a lot of circumstances, entrapment not only leads to the destruction of the business, but also the destruction of the family.

Entrapment has the potential to:

– Create conflict between generations.

– Create conflict between siblings.

– Create a lazy business that becomes financially unsustainable.

– Lead to business being unable to financially support the educational needs of their children.

– Lead to further generations walking away from the family business, to avoid repeating the same mistakes.

We have worked with some great family businesses that have managed this situation well. Simply click on the image below to Learn about Kelly Grains . . . Keeping Business in the Family

Unfortunately, for those that have not managed it well, so much damage has been done that it is difficult to repair. However, it is not all bad news and good family governance can help resolve this problem, as it generally creates better communications. This could include having a formal board or advisory board for the family business.

At Business By Design we suggest introducing the following steps to family business for greater success:

  1. Meeting structure.
  2. A family constitution.
  3. Open communication.
  4. Formal job description.
  5. Clear business strategies.
  6. Clear transition plans in place, agreed by all and communicated to all.

 

To help you ensure your business is avoiding entrapment and on the right track to transitioning between generations we offer you our free Succession Diagnostic to help you pin point the key issues and opportunities for your business. Simply click on the link below.

Naturally if you are concerned about entrapment in your family business we encourage you to contact our team. Start making the changes needed to ensure your loved ones are the first priority and your legacy has the longevity it needs. Don’t leave it till it is too late.

Regards

Sean Martyn

Phone (02) 6658 0775