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Helping Family Businesses
Prosper Across Generations®

Employing Family Members as Vendors and Supplier

By Stephen L. McClure, Ph.D. and Christopher J. Eckrich, Ph.D.

 

As businesses and families grow over time, it is highly likely that, at some point, a family member will ask or be invited to provide services or be a supplier to the family business. A variation on this theme is a family member who seeks to own a franchise or an independent distributorship. While this practice is not inherently either good or bad, we see businesses split on whether using family members or their firm as vendors is a good idea.

 

Consider this. Your sister Karen has just gone into the catering business. You want to champion her business and encourage her by hiring her firm to cater all company entertainment functions that impact your reputation and image in the marketplace. But you pause,What will you do if her firm's product or service is substandard? You have a duty as the CEO to protect your business's reputation for quality. Furthermore, you begin to wonder whether your cousin, a small minority shareholder who works as a CPA, will now expect to handle the firm's tax work. You already have an experienced and trusted accounting firm that is delivering a good product at a good price.

Scenarios like this often lead family business owners to implement a policy that family cannot be used as vendors or suppliers of any kind. This firm rule avoids the potential conflicts identified above and is a popular policy for many family business owners. But what if you already employ a family member as a vendor or believe that a family member's firm can provide a superior product or service?

Family businesses that engage family members as vendors are encouraged to consider the following:

  1. Clearly state expectations for quality and service, as you would for any other vendor. To reinforce the expectation of a business-to-business relationship, rather than that of a family member to family member, put your expectations into a friendly but clearly worded memo. The memo should clarify the expectation for a successful business relationship and identify quality and service expectations so that they are clearly stated by the other party. This memo can be shared with others---with affected managers and employees in the business, as well as with family members---to accomplish the next point: transparency.
  2. Seek transparency among family owners about the nature and scope of the work provided. All interested parties should be aware of any business relationships between family owners/members and the family business. Talk openly about the effectiveness of the business relationship in whatever forum makes sense for your family business. In some cases, the right forum is a family meeting with the principals on both sides of the business relationship. Or it might be a management meeting. These discussions work well as long as there is an effective supplier/customer relationship. If something has gone wrong, however, see below.
  3. Put the services up-to-bid to multiple vendors on a regular basis (usually every one to two years) to assure that pricing stays competitive. This does not have to be a cold approach that sends the message that you do not value an existing business relationship, rather do it in a way that simply allows you to assess your needs. If you are paying a little more for the relationship and value doing business with a trusted relative, understand that and make sure everyone else does too. If you are paying less because the family vendor is giving you a deal, be clear, but beware. This kind of arrangement can backfire if there is an assumption on the family vendor's part that reduced quality and service is okay because of the financial consideration he or she is giving. If you find that you are paying too much, you will have valuable information for a negotiation discussion with the family vendor. Another good practice is to initiate a contract term and let the family vendor know that the services will have to be renegotiated at the conclusion. At that time, evaluate the business relationship and consciously decide whether to continue or make changes.
  4. To minimize conflict, present the proposal to the board (independent, objective outsiders on the board help here) for review and approval. A family vendor, knowing that this is a step in the process, will increase his or her own attention to the professional nature of the business relationship.
  5. Annual reviews of existing family vendor relationships at the board level also are a good practice. In larger family firms, consider appointing a committee of several outside directors (two to three) and key managers (one to two) to review all family vendor and supplier relationships. Some family firms already may utilize a compensation committee to review family member hiring and compensation decisions, and this committee's scope could be expanded to include family vendors.
  6. Use the normal method of making changes to your family employment policy to add a policy statement about family supplier and customer relationships. We hope your process involves a meeting of family members so that expectations are communicated and broad acceptance is promoted.
  7. Fix the relationship if it's broken. A severed business supplier relationship can be like a divorce. It is either messy or not, usually depending upon the civility of both parties, not just one. However, after exhausting all genuine efforts available to fix the relationship, make a clean break if that is the only remaining option. In many cases, severing a business relationship with a family vendor is like firing a family member. See the excellent article by Bernard Kliska in the July 2004 issue of the Family Business Advisor on firing family members.

Finally, we hope your business-to-business relationships with family members are successful. We frequently hear of the mutual benefits received when they are working well. But the key to this success is a professional and formal business relationship on both sides.

 

 

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