Surely we’ve all heard the edict “form follows function.” This means that the form or shape of a structure is correlated to the purpose or function of that structure. Having the right shape, structure and form is important, and when conditions dictate, a being or entity must evolve. There are plenty of animals that are now extinct because they could not adapt to evolving conditions.
This concept of adapting and evolving also applies to family-owned businesses. Often a family business is structured to reflect the way in which the family interacts in the home and around the dinner table. The business structure has more to do with family member interaction than it does with the nature of the business. When this occurs it can be a formula for disaster. At the very least, it puts the business at risk.
I’ve worked as an advisor to many family businesses where the structure of the company caused total chaos. One particular family business owns and develops real estate – building the infrastructure and buildings, retaining ownership and entering into leases with tenants. Those in the business must carry out many distinct functions to make it all work. Included are such jobs as accounting, personnel management, leasing, rent collection, maintenance of property, as well as planning and developing future projects.
The founder of this business had four children who made up the second generation. When the second generation entered the business, all activities and functions were organized around dividing responsibilities into four parts, making certain that each of the siblings “got their share,” which meant managing a part of the business. Their positions were not created based on the needs of the business, but rather on making sure to include each of the siblings.
Each sibling had an area of jurisdiction in the business. However, they also shared their opinions and meddled in the areas for which their siblings had the assigned responsibility. There wasn’t a clear structure, or “form” for this business. It was complicated enough when there were only four family members involved. As part of the transfer of control to the third generation, the second generation passed everything to their ten children.
If you think it was complex at the second generation, you’re right. After the third generation took over, it was a giant mess that threatened to undermine the entire company and diminish the value of the asset pool. This business needed help!
When creating solutions for a family business in this situation, the first step is to analyze the functions that need to take place to make the business work. It requires looking at the entire matrix of activity in a new light. You must ask questions like, “What does it take to get the job done?” After careful examination of the answers to this question, related functions can be clustered together, helping to organize the business. Each cluster becomes a unit of responsibility. In the example here, it is unlikely that there will be a place for all of the ten children in the third generation. There will definitely not be a top-level job for each of them.
After organizing the business into areas of responsibilities, the next step is time to make job descriptions for the leadership of each function. What are the skills necessary to function as the leader of one of these units? Rather than simply assign a family member to one of these positions, as this family did in the past, they had to adopt the policy that family members must have the necessary skills to operate in the position they hope to hold in the family enterprise.
A business functions best when the owners have a clear vision of the future and goals for the business. This vision, coupled with a standard for employment that is based on competence, forms the foundation for the success of the business. No business does well when there are less-than-competent persons in key positions.
Consulting with this family to take them through the process of analyzing and restructuring the business was not an easy process. This task requires careful and thorough discussions and a commitment to find the best structure for getting the work done. It cannot be approached from a standpoint of ensuring that everyone has a job. The purpose of this process is to do what is right for the business. After all, a family business is, first and foremost, a business. As I advise in The Little Red Book of Family Business, “If something is right for the business, the owners will benefit in the long run.”
How a business is structured becomes a very strong influence on how it operates. There should be only as much structure as is necessary to get the job done. The most challenging element in the example above was to change the structure so there was a hierarchy in which people have clear responsibility for a job, have the authority to get the job done and are held accountable for the outcome. When everyone dabbles in everything, it is impossible to hold anyone accountable for the outcome.
Here are a few questions to ask yourself about your family business:
- Does the structure we now have allow us to operate our business in the most effective manner?
- What is the minimum structure we require to run our business?
- How do we hold persons accountable for their performance and for the outcomes of the division they lead?
- Do we have clear job descriptions for each position and do we require demonstrated competence from the persons we place in those positions?
- Can we operate with fewer persons?
- What is our shared vision for the company?
After giving thought to these questions, you might find that a new structure is in order, based on the concept that the function of a business determines the form. Out of this process comes a refined structure and greater efficiency, which ultimately leads to higher profitability. This should be the goal of every family business.
Does Your Family Business Need Help?
Family Business Matters has extensive experience assisting family businesses. With many decades of experience, we understand the wide variety of challenges that families face as they work together to build, grow and sustain a thriving family business generation after generation. Through conferences, continuing education programs, family business retreats, speaking engagements and private family business consulting services, Family Business Matters has assisted more than 450 family-owned businesses around the world chart their way through family business issues of all shapes and sizes.
For more information on how Family Business Matters can help your family business survive and thrive, please contact us today at (970) 948-5077.