Family-Owned Businesses in the Middle Market
According to a report from the National Center for the Middle Market and the Economist Intelligence Unit, family-owned businesses make up 25 percent of the middle market's nearly 200,000 companies nationwide. To promote the important contributions of these businesses to the U.S. economy, the NCMM joined the Family Business Seminar at the School of Business, University at Albany.
The seminar covered fundamental considerations in leading and governing an effective and profitable family-owned or other closely-held enterprise. Participants heard from panels of faculty, experts and professionals on how to leverage the strengths of family business management and successfully implement practices that drive high performance and healthy family relationships.
NCMM contributor Chuck Leddy recently posted a blog about how family-owned businesses attract and retain top talent without sacrificing culture. He highlighted four keys to success:
- Clearly define the outside talent's role and authority. You can't bring someone in from the outside and then ask them to negotiate what they'll be doing and how. No outsider will join an family-owned business unless roles and authority are clearly detailed and enforced. When conflicts arise between the outsider and family members, it must be clear that business imperatives drive the decisions, not "insider" relationships among the family. Both sides must understand this in order to build trust.
- Prepare both the outside talent and the family for cultural integration. The cultural fit between an outsider and a family-owned business is so important that preparations must be made to integrate the two. Non-family members must feel part of the family-owned business' power structure. Including them in relevant communications is crucial. Involve them in management discussions in the office. And if important decisions get made outside the office, such as at family gatherings, find a way to get the outsider involved. All members of the family must understand the need for greater transparency.
- Carefully consider how to structure incentives for outside talent. The base pay family-owned businesses offer must be competitive, but you'll also need to consider short-term incentives that align with your family-owned business' operational goals and long-term incentives that align the outsider with the strategic vision. You'll need to share any added value the outsider creates, and the distribution should be fair. Stock, or sharing the family-owned business' equity, is just one way to do this. Think carefully about cash incentives and how value generation gets measured and distributed.
- Promote clarity and fairness. Most importantly, both parties must be clear about what they're getting into. The family-owned business needs to understand that outsiders can bring valuable know-how into the company. The outsider needs to understand the importance of fitting into the family-owned business' unique business culture and work within those cultural boundaries. Finally, the value created by outsiders must be recognized, respected, and fairly compensated. Sharing equity might be one way to do this, but family-owned businesses should also think outside the box to find other long-term (non-equity) incentives to motivate and retain outside talent.