Rules to live by

Entrepreneur, Feb, 1999 by Patricia Schiff Estess

Keep the peace! Written policies help family businesses stay on the right track.

Most family businesses don't need written family policy guidelines during their first few years of operation. If available and willing, spouses, children, parents, cousins, aunts and uncles pitch in during the overwhelming initial stages. The founder or founders make decisions on the fly. And while the decisions may create a stir from time to time, it's not until a nephew says "What do you mean I can't come work here when I graduate from college?" or a child says "I thought when I was ready to take over the business, you'd leave" or a bank says "We'd like to see a succession plan before we lend you any more money" that most family businesses think about establishing written family policy guidelines.

STARTING EARLY

In the best of all possible worlds, the realization that guidelines are essential if the family wants the business to succeed from generation to generation is enough to get a family working on them. That's what's happening at MCI Products Group, a Plainview, New York-based family business that creates, develops and manufactures new products, ranging from collectibles to gifts and decorative items for clients. Brothers Mike and Bruce Zutler are the second-generation leaders of this company, started in 1970 by their father, Aaron.

"We're thinking about a whole slew of family business questions," says Mike. "Should spouses be allowed to work in the business? (Bruce is married; Mike isn't.) At what point and how will children come into the business? (Mike has no children; Bruce's are young.) Should children be required to work elsewhere first? We'd like to think through the problems before we have to face them."

WHEN A NEED ARISES

The Zutlers are unusual. Most families don't tackle family policy guidelines until the company is flooded with relatives or "until a benign event occurs, such as when the founder faces the succession issue," says Ron Norelli, founder of Norelli & Co., a business consulting firm in Charlotte, North Carolina.

That's what the Gersh family did when father Max decided to retire from Maxons Restorations Inc., the Manhattan, New York, emergency property-damage restoration firm be and his son, Damon, founded 10 years ago. The Gershes' business had almost been toppled once before because of the blurring between business and family policies. "If we had some family guidelines when my older brother David joined the firm several years ago, maybe it would have worked out," says Damon. "We would've set ourselves up for success if everyone's expectations had been addressed in advance. But we didn't do that, and it was a blessing that my brother did an inventory of what he wanted and decided to leave the business. At least we preserved - maybe even strengthened - our personal relationship."

In light of their almost disastrous experience operating without family policy guidelines, the pair did things very differently when Max announced he wanted to retire. Damon and his father scheduled meetings to deal with issues before they became problems. "What resulted from those discussions was a formalized process for the transition," says Damon. "As a result, the succession was very easy."

It's most treacherous to set policy when a legal, financial or family crisis is looming. In this scenario, you're typically under tremendous time pressures that don't allow you to fully explore options and examine the consequences of a decision rationally. Sometimes, if you're lucky, things might turn out all right - for a while. Too often, however, family businesses under the gun set policies they wind up regretting.

LAYING THE GROUNDWORK

Before creating the policies themselves, the family needs to lay down the rules of engagement. "Every family member participating in the discussions needs to be able to withstand any disagreement and not take it personally," says Joseph Astrachan, co-author of Family Business Policies: Your Guide to the Future (Business Owner Resources Publisher) and a professor of management at Kennesaw State University in Kennesaw, Georgia. It also means participants need to put aside or resolve old resentments and hurt feelings before the discussions begin. "Otherwise, the family winds up frustrated by the process or constructing something on an unstable foundation."

Each family's policy will be different, of course, but underlying any written document are two basic principles:

1. What's the purpose of the family business? Will the business operate to serve the family or will the family operate to serve the business?

2. How will important decisions concerning the business be made? Will they be by a simple majority rule vote of shareholders, through consensus, by the chairperson in conjunction with a board of advisors, or through some other type of arrangement?

Family business advisors experienced in developing policy guidelines can help move the process along more quickly. They can provide input about policy issues and help families make fewer false starts. But they don't make policy - that's the family's weighty, but vital, responsibility.