“Family businesses are the backbone of the economy of just about every country on Earth, and the wealth of nations depends on them.” So writes Grant Gordon and Nigel Nicholson in Family Wars: Classic Conflicts in Family Business and How to Deal With Them. The authors take pains to emphasize that not all family businesses are hotbeds of drama and scandal. But alongside descriptions of business deals, can be found stories of romance and treachery.

Consider the drama of the fashionable Gucci’s. This family’s business dealings read like a “tragic Italian opera.” Paolo, grandson of the founder Guccio Gucci, sent documents to the authorities showing his cousin Maurizio had evaded taxes. Maurizio had to sell his shares, which angered his ex-wife, Patrizia, because this action deprived their children of any inheritance. The unhappy ending: An unrepentant Maurizio was murdered in 1995 by an assassin hired by Patrizia. She went to prison.

Let’s call that a “worst case scenario,” which hopefully you can avoid by paying attention to a few simple concepts that are just good advice for any business. When family is involved, suddenly the decisions are more complex and even the simple issues that arise in every business are potential powder kegs. You need some straightforward, irrefutable rules for working together in a family business.

Karen Price-Mueller, an award-winning personal finance writer, suggests these five Must-Dos for minimizing conflict in family-owned businesses:

Create a Hierarchy

“It’s crucial for any business to have an unambiguous chain of command and clear job descriptions, but this is especially true for family-owned businesses.”

If relationships are not clearly established and based on valid skills or knowledge requirement, you can expect petty quarrels and squabbles to result.

If there are non-family employees, they must clearly know who they answer to within the family. You can imagine the excuses and finger pointing that could arise without a clear and respected hierarchy. A prominently posted organization chart is a useful reminder of roles and responsibilities.

Communicate Appropriately

“A lack of communication, or miscommunication, can cause frustration and resentment. You can’t simply pass important company news to your family partners at a weekend barbeque or chat about client issues at grandma’s birthday party.”

Regular meetings with published agendas are crucial to the success of any business, but are even more critical for family businesses where the dining room table doubles as the conference table. One family business uses name tents with job titles when they gather around the kitchen table for a business meeting. They also have developed a practice of reminding each other to keep family and social events sacred and free from the business – “don’t try to recruit Aunt Sophie while we are at Cousin Jimmy’s wedding.”

Set Compensation Rules

“A startup may not provide even enough cash flow to compensate family employees, but if the business lasts and prospers, you must have a predetermined compensation plan.”

Compensation in business should be based on productivity and worth (Capitalism). However, the distribution of wealth in families is often predicated on need (Socialism). This is one of the most difficult challenges that a really successful family enterprise will face. “Who gets what?” Keep in mind, well-run businesses pay on what the job is worth in the marketplace, not who is liked the most.

A skilled compensation consultant can bring an independent, objective third party assessment to the business. Since it’s just about the facts, decision-making becomes easier, avoiding a potential squabble that could become a festering sore spot.

Establish a Welcome Plan

“Create a plan to address how family members who may want to enter the business will be treated.”

David Levi, managing director of CBIZ MHM, a professional services company, suggests not permitting a family member to join the business unless they have established a proven track record elsewhere. As with any new hire, you want to ensure they bring value to you.

This would be ideal, but in reality, it may not always be possible. It’s recommended to have a clearly defined training path, with measurable milestones, scheduled updates, and pre-determined consequences of meeting and missing the milestones. Combine the training with a reasonable probationary period and you have a workable solution to the new family addition.

If the family is multi-generational then you have potential conflicts among the generations over basic values and work ethics. Again, a skilled facilitator and coach from outside the family might be your best chance to defuse a possible powder keg of misunderstandings, resentments and even all-out-war among the troops. Baby Boomers are wired for work with pride in being workaholics. Gen Y is wired for projects and once they’re done they are ready to leave regardless of the time of day.

Have a Succession Plan

“You may plan to stay with your business until the day you die, and maybe you will. However, you still need a succession plan to make sure your business will survive after you’re gone – something too many businesses fail to do.”

“Happily ever after …” might be your plan, but we all know that the best laid plans USUALLY go astray. Hoping that Junior will follow in your footsteps is a long-shot at best in today’s wide open world of options. You need a succession plan; a written succession plan with life insurance policies to provide for the families and compensation as it relates to their stakes in the business is your goal here. If there are just two of you, make sure you have policies with each other named as the beneficiary.

And you need a back-up to the succession plan. Even in non-family businesses, a newly crowned leader may fail, so you need a Plan B. A 2007 survey by American Family Business found that 25 percent of family-owned businesses don’t even have a Plan A. Senior members of the business had no estate planning other than a will. And with more than 40 percent of owners planning to retire in the next 10 years, nearly a third had not yet picked a successor.

Here is a List of Don’ts:

DON’T leave family members open to liability. Family businesses can and should be either incorporated or set up as a limited liability corporation (LLC).

DON’T cut corners. When working with family, there’s often the tendency for members to slack off a little. You may think your family will be more forgiving, but family members are often more critical of each other.

DON’T bring family disputes to the workplace. Family-owned companies have long been the stuff of prime time soap operas (Dallas and Falcon Crest are two classic examples). Running a business creates enough drama; you don’t need to import more.

If you love spending time with your family, you might think working at a family business would be a dream job. That dream could quickly turn into a nightmare. So do yourself a favor and follow this simple rule of thumb:

Treat your employees like family.  Treat your family like employees.

Checklist for Family Businesses:

(adapted from www.bizmove.com)

1. Do family members know they are welcome to join the firm?

2. Do we have policies for entry into and exit from the company?

3. Is a system in place to train and develop the successor?

4. Do we have a succession plan?

5. Can family members in the firm effectively communicate?

6. Do we have a system to resolve conflict among family members?

7. Are women welcome in the business?

8. Is there a minimum amount of sibling rivalry in the firm?

9. Is there a system in place for choosing a successor?

10. Does the family agree on goals for the business?

If you answered ‘No’ to any item above, action should be outlined and implemented to address and set policies for that item.

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This article is an excerpt from Kathleen Rich-New’s new book, You Always Need A Plan B:

The real deal guide to jump starting your next career. Available early in 2011.