It is typical for ventures to arise from a position of trust, where friends or family members come together to start a business. Friendship itself can help facilitate the flow of ideas and business at the outset, but it can also open the door to ignoring “formalities” and legal issues or putting them off until later. Usually, it is not until things are going great—or terribly—that people start to think about the legal structure that will support and grow the business.
Over the years, these businesses can become family partnerships where new players join and actively participate in ownership, management, or both. But reality and numbers are stark. Only 40% of family businesses survive into the second generation, and only 15% make it to the third[1]. This intergenerational erosion is often related to dependence on the founder, lack of institutionalization, absence of clear rules, or family conflicts.
Therefore, adopting corporate governance principles from the outset increases the likelihood that the family business will be sustainable over time, as it defines expectations, reduces tensions, and professionalizes operations. Some measures that can be adopted are:
- Establish a board of directors with external members to ensure objectivity.
- Invest resources to establish clear decision-making structures. This includes implementing independent oversight and internal policies to institutionalize operations, identify risks, and manage threats to the family's estate.
- Define clear succession and contingency rules for times of crisis or transition.
- Design a training plan for new generations, including the requirement that they gain prior experience outside the company.
- Create a family office to separate the business from the family's estate. Even if you do not have a large amount of assets, it can be useful for centralizing finances, promoting philanthropy, and facilitating generational continuity.
Mixing Family and Business is Not Easy
Working with family requires emotional maturity, self-awareness, and clear boundaries. Putting personal conflicts aside is not easy in general, but it becomes even more challenging when it can directly impact the future of a business.
As the Harvard Business Review (HBR) explains, having a plan B outside the company is healthy, as it helps prevent personal identity from being conditioned by family roles and allows decisions to be made free from emotional pressure[2].
Another issue we should keep on our radar is the mistakes that are repeatedly made in family businesses. According to Josh Baron, advisor at Banyan Global and professor at Columbia University[3], these are some of the mistakes that must be avoided at all costs:
- Joining for the wrong reasons: If the only motivation for getting involved is “because there is no other option,” it can convey a culture of conformity that affects performance.
- Expecting promotions without effort: appointments or promotions without merit not only damage team morale, they also prevent more qualified people from accessing the position, which will affect the business. We must remember that ownership does not equal employment rights.
- Skipping the chain of command: following established channels, regardless of the role, is essential to strengthening institutionality.
- Blurring the boundaries between home and office: it is necessary to establish clear boundaries between family and business. Discussing personal or family issues at work meetings, or vice versa, compromises the professional environment.
- Not being aware of visibility: occupying a leadership position means being constantly exposed to the team. In family businesses, family members must be aware that every action, even a gesture, can be interpreted as favoritism.
We tend to associate success with the effort we put into something, but the truth is that the future of a family business does not depend solely on the passion of its founders, but on their ability to institutionalize that vision.
Founding a company or helping it grow over several generations is a rewarding experience, but it will be a potentially unattainable challenge if clear rules are not established from the outset to professionalize management, preserve relationships between partners, and attract future investment.
If you have any questions or concerns about this topic, please do not hesitate to contact us.
[1] Espiñeira, Sheldon y Asociados. Empresa Familiar: Retos y Oportunidades. PwC Venezuela, 2011. https://www.pwc.com/ve/es/auditoria-interna/boletin/assets/empresa-familiar-retos-y-oportunidades.pdf
[2] O’Hara, C. (2016, June 14). Keeping it professional when you work in a family business. Harvard Business Review. https://hbr.org/2016/06/keeping-it-professional-when-you-work-in-a-family-business
[3] Baron, Josh. “The Common Traps of Working in Your Family’s Business.” Harvard Business Review, 6 Nov. 2017, https://hbr.org/2017/11/the-common-traps-of-working-in-your-familys-business.