In the classic science fiction novel Dune, a master assassin named Thufir Hawat reminds Paul, the story’s hero, “The first step in avoiding a trap is to know of its existence.”

The same is true of risks to family businesses: The first step in risk management for a family business is to acknowledge its existence. This is harder than it seems and may indeed appear counterintuitive when viewed out of context. Family businesses experience risk on several levels, but many failures and shortcomings can be prevented by avoiding these five common mistakes.

1. Incomplete Documentation

In a family business, procedures often evolve over time as a result of experience and are adjusted as necessary without notation or standardization of those protocols. If your habits, routines, or methodologies are never in writing, you’ll end up wasting a lot of time and energy trying to reestablish a good working relationship with customers, vendors, employees, or family. This is true whenever business must be carried out by a surrogate.

2. Inconsistent Communication

Formal and detailed communication between management and owners (even when they’re the same people) may seem inconvenient, but it will give future managers a clear understanding of your choices and make it clear when family communication is necessary. By providing reason and instruction, you can empower your family and employees; this will direct everyone’s efforts toward a unified, consistent goal.

3. Incompatible Financial Interests

Familial relationships in a business can cause complications when financial and personal goals are not aligned. Emotional ties will often derail plans as interests compete for priority status. When all family members share the same vision and strive for the same goal financial goals, your company will more likely see consistent progress.

4. “Lone Wolf” Syndrome

Owners commit to being an active part of their social and business communities, and strong community ties are integral to the prolonged success of a family business. Creating these lasting relationships drives new and repeat customers, but can be deterred through self-imposed isolation or alienation of people important to the business.

5. Lack of an Advisory Board

An advisory board provides a business leader with consistent recommendations and acts as a repository for institutional knowledge. Should something unexpected happen to the CEO, a qualified advisory board will be able to advise the successor, maintain the viability of the business, and facilitate a seamless transition.

A family business can either create a legacy that will support future generations or leave a burden of financial and managerial chaos depending on how they’re prepared. Avoiding these pitfalls is the first step toward guaranteeing that your investment never falls victim to unnecessary risk.

Originally posted on Worcester Business Journal August, 17 2015.

Share This