Creating structure in a family business

A father-son company seeks advice on formalizing roles and building a sustainable structure for growth.

James, Miami, Fl.
I am part of a small family-owned drywall contracting company, with previous experience in estimating potential projects. My father is the other half of the company, as he has experience in field work. We have experienced some success already, but I’m looking to create structure in our company and lack the experience to do so. What are the steps that I need to take to create clear-cut roles that I should follow? Do my dad and I need to assign responsibilities that we each stick to?

By Emily Maltby, CNNMoney.com staff writer
Defining roles is always difficult, and is even more challenging when the other party is a family member. Your general goal should be to establish clear spheres of responsibility – and then stay out of each other’s area of expertise.

Gary Naumann, lecturer in entrepreneurship at the Carey School of Business Arizona State University, recommends sorting the critical tasks of the company into functional areas, such as operations, sales, office administration, finance and accounting. Then decide which of you is best suited to overseeing each area.

He suggests dividing and conquering so that you don’t double-dip on every little issue. “In a small but growing business, there is no time for you to confer with each other about all the details of your respective areas of responsibility,” he says. “My experience is that most of what each of you does in those areas should be done independently, thereby reserving the discussion time for those critical issues that require consultation.”

This will become even more essential as you add employees – those who work for you will want to know what is going on and who to consult about various tasks. One tactic Naumann suggests is a “Who Does What” outline that you can hand out to your associates.

“This should not be limited to just the two of you,” he says. “Rather, it should encompass all the key areas of your company so you are able to comfortably delegate certain tasks and everyone in the company knows who the ‘go to’ person is.” This will also help you and your father concentrate on your key tasks.

Of course, with the division of responsibilities will come the challenge of remuneration. Formalizing pay arrangements is a key part of creating an official business structure.

“Compensation of family members is much less likely to be based on any objective criteria,” says Allen Fishman, author of 9 Elements of Family Business Success. “The sooner the family business leader takes control of creating objective standards for dealing with compensation issues, the more likely it is the businesses will survive and flourish into succeeding generations of leadership.”

Fishman recommends putting your policy into writing. “A clearly stated compensation policy often prevents conflict and is the best way to break through the emotional barriers that commonly come into play when discussing compensation,” he says in his book. “It would be best if the family business developed its employee compensation policies to approximate the industry levels to some degree. It’s not at all uncommon for family businesses to employ family members for more than the going rate.”

If your company doesn’t pay salaries and instead splits profits, compensation is generally based on ownership stakes. “From a tax standpoint, you can’t start a business without a document that shows ownership,” Fishman says. “If, for instance, one person runs a warehouse while another runs office operations, the payouts may be the same if they each own 50% of the company – even though their skill sets have different market value.”

Fishman warns that in a very small business, such as a father-son operation, the issue of formalizing ownership stakes often isn’t discussed unless there is a problem – when it’s too late.

“Don’t wait for a feeling of unfairness to arise before you sit down and talk,” he recommends. “Documenting your visions for the company and how it should be run will help to ensure the company doesn’t break apart in the future.”