Don’t Let “Fault Lines” in the Family Business Become Earthquakes

Moving tectonic plates on the surface of the earth have and will always cause fault lines. These points of convergence and pressure are inevitable and can cause earthquakes at a large scale.

Due to divergent desires and changing personal situations of family members, such points of convergence and pressure can be found in families-in-business and can cause inevitable fault lines. Unlike geological faults, however, active steps can be taken in a family business to prevent the fault lines from causing earthquakes.

What are some common “fault lines” in a family business?

Let’s say that some members of the family own shares but do not work in the business. They often prefer that profits be distributed as dividends. Other family members who do work in the business often prefer that profits be reinvested in the business. There is no “right” or “wrong” – but there are certainly conflicting opinions! A similar conflict can arise when some shareholders want to sell their shares back to the business, but the other owners do not want to purchase the shares, or do not want to meet the price demands of the seller (or the seller does not feel that “book value” accurately represents the value of the shares, or the seller does not agree to a 30% discount for lack of marketability). Some family members in these situations, beyond simply having a difference of opinion, eventually come to see their fellow family members as greedy or manipulative. No amount of listing “pros and cons,” and no amount of active listening can solve these conflicts. Unless proactive steps are taken, these inevitable “fault lines” are likely to become earthquakes and will shake the family business to its core.

A family business can proactively address inevitable fault lines by:

  • Having shareholder agreements which indicate terms and conditions for buying and selling shares.
  • Having a family charter or constitution which addresses the issues of dividends and reinvestment, as well as other common sources of conflict regarding family member employment and compensation.
  • Having an agreed-upon process (described in the family charter) to engage others, e.g., family elders, or external advisory board members, or mediation, in addressing conflicts.
  • All of these approaches to preparing for inevitable conflict are great but there is one activity that is even more important: Building “family glue”. When a family feels connected to each other in positive ways, when they want to maintain family relationships, there is “family glue”.
  • A family builds “family glue” by:
  • Creating, or reaffirming, the vision and values for the family and for the business.
  • Having regularly scheduled family meetings where each family member can express their own hopes and dreams and concerns, and others in the family can help them reach their goals. When aunts and uncles are helping nephews and nieces, there is family glue. It is even better when family members are being helped to grow in their self-sufficiency and independence so they are less dependent upon resources coming from the family business.
  • Keeping all family members current regarding business issues so they feel connected to the family business.
  • Creating activities where the family can have fun together.

How does “family glue” help to prevent fault lines from becoming earthquakes?

When there are strong positive connections between family members and strong positive connections with the family business, family members are more willing to compromise and less ready to see each other as greedy or manipulative. Compromise is the only solution for these “problems which cannot be solved,” and when there is more “family glue,” there is more willingness to compromise.

Some families-in-business are “too busy” to build “family glue” – and when everything is going well, it does not seem necessary. Preparing for inevitable fault lines requires family leaders who have the foresight to guide the family in strengthening their “family glue” as a foundation for family and business sustainability.