Double trouble: family members as business partners

by Lauren Nohelty, Student at Babson College

Family businesses are the epitome of the American Dream. An individual starts a business, watches it grow and thrive, and then hands it down to future generations. However, without succession planning, the conflict and drama can result in losses into the billions of dollars, which is what happened in 2014 to Market Basket, a premier New England family-owned grocery chain.Victoria Crittenden and her colleagues explored this case in a recent article in Industrial Management.

The Market Basket dynasty started when a husband and wife, both Greek immigrants, captured the American dream by opening a neighborhood food store. In 1954 the two Demoulas brothers (second generation) bought the business from their parents. However, when one of the brothers died suddenly, his share of the company was left to his children. The remaining brother took control of the company, but court battles determined that the deceased brother’s heirs would control 51 percent of the business. In 2014, the battle erupted when one heir (who was initially loyal to her uncle) switched sides and helped to oust the family leadership. This decision sparked massive protests and employee strikes resulting in a loss of $10 million dollars per day. This situation is an example of what can happen when family businesses do not have succession planning. The authors of “Family Business: When You Can’t Choose Your Partners” studied family businesses and offer the following recommendations.

Succession Planning is Key

A lot of family businesses avoid succession planning because the leader does not want to choose between heirs or family members when deciding who will take over after they are gone. However, without a succession plan companies are subject to uncertainty and instability. So even though this may create conflict among family members, it is important that as the leader, you ask questions such as:

 “How will the business transition to the next generation?”

“What are the future roles for family and nonfamily members?”

“Is the next generation expected to invest financially or will family members inherit ownership?”

Without answers to these questions, the transition between generations may become chaotic, as it did with Market Basket, and potentially destroy the company.

Strategic Planning: Integral for Firm Growth

Strategic planning is essential for innovation, firm growth, and survival. Market Basket, despite their family feud, had a strategic plan that allowed them to grow in the market. One of the problems with a family business is that some leaders become emotionally attached to previous strategies developed by their predecessors. Reluctance to change stifles growth and can potentially destroy a business. This is why it is important that the current leader develops a strategy to promote long-term viability.

Establish an Organizational Structure

An organizational structure provides the framework for control and power in all organizations. With family businesses, it is important to establish roles for each individual family member because politics can affect the day-to-day operations of the firm.  This structure may change depending on the generation of the leadership. The first generation is the founding generation which means they are the controlling owner and manager. The second generation can be a sibling partnership (like Market Basket) and the third generation is more likely to be a cousin consortium in which members manage the business. No matter what structure is in place, there needs to be a strong managerial leader who is able to garner and maintain support from all family members.

Choose a Leader with Affective Commitment

Affective commitment highlights an individual’s emotional bond to the organization and the obligation he or she feels to reciprocate positive feelings toward the company. Family businesses need managerial leadership that prepares for the transition in order to ensure that the succession plan motivates others to grow the firm.

Plan by Generation

The first generation should establish the succession plan and strategic planning in order to achieve growth. This is an important step because a succession plan will help these leaders continue their legacy while a strategic plan will help the company respond to marketplace demands. The second generation typically has slower growth than the first generation. It is important that the right successor is chosen from this generation -- someone who is capable of handling family politics particularly as siblings work together. Strategic planning becomes less important because too much involvement in this by the second generation can cause tension and impede growth. Finally, third and later generation without a strategic plan have, perhaps surprisingly, shown more growth. This is because they benefit from the vision and goals outlined by previous generations. The key here is succession planning because there are numerous family members involved in the business, each of whom needs a defined role and should be led by the strongest and most established leaders.

In sum, the best advice for family businesses according to the authors of the article, “We recommend that family businesses engage, more or less, in both types of planning as appropriate for their generation.”

Article citation:

Crittenden, Victoria L., William F. Crittenden, Kimberly A. Eddleston, Franz W. Kellermanns, and Steven W. Floyd (2015). “Family Business: When you can’t choose your Partners,” Industrial Management, September/October, pp. 12-17.