All in the family: how to build a well-run family business (or compete with one).

Great family businesses share certain traits: loyalty among the team, vigilance and competitiveness in their fields. Those that pass successfully from one generation to the next have a sense of cohesion because, deep down, family members really do care about each other and they can get through the hard times. They've found ways to manage conflict--not always resolve it, but manage it. They've also figured out ways to make decisions when there are differences of opinion. Yet, real pitfalls lurk.

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The biggest challenge is being insulated from the outside world, says Ted Clark, executive director, Center for Family Business at Northeastern University. Another is the boundary issue--mixing up family and business, so they're making business decisions based on family issues and vice versa, says family-business consultant Jane Hilburt-Davis, president of Boston-based Key Resources.

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The payoff for family businesses that can make it, though, can be great. "When a family business works well, you can't beat it," says Northeastern's Clark, who considers publicly traded corporations at a disadvantage due to their short-term horizons. Family businesses "pull together for the right reasons, and it's not a 13-week [profit] payoff. It's for the good of the family. It's good the employees, it's good for the community, and it's long-term. "It's really hard to compete against them. You think about a business that is saying: I'm going to take my payoff next year, or I'm going to take my payoff in the next generation."

So how to avoid the pitfalls? Here are some keys:

REMEMBER: YOU HAVE TWO EARS AND ONE MOUTH.

Use them proportionately, says family-business consultant Paul Karofsky. He was a third-generation CEO of his family's wallpaper business before he sold it and eventually helped launch Northeastern University's Center for Family Business. Communication is essential, he and other experts say. While close family members tend to have insights into each other's thinking that wouldn't exist among business partners who aren't related, it's essential they hear each other out on business matters, rather than assuming they "know each other's views.

"Really, the lesson is: Enhance your listening skills. Employactive listening techniques," says Karofsky, now principal of Transition Consulting Group in Palm Beach Gardens, Fla., and a Family Firm Institute board member.

During conversations, our energy tends to be mainly focused on ourselves and our own responses instead of understanding what the other-person is actually saying, Karofsky says. "But what we need to say is: It's OK to take time out. It's OK to listen. That, to me, is absolutely vital."

FIGHT INSULATION BY SEEKING COUNSEL FROM AN ADVISORY BOARD OF EXPERTS.

"I don't think you can name one long-term successful family business--and by successful, I mean of any substance--that's had longevity and not used an advisory board," Clark says. "You need an outside perspective. That's the common pitfall."

No golf buddies, not your attorney, not your accountant--they don't belong on the advisory board. (You're already paying the latter two for advice, Karofsky says. Plus, they're never going to recommend firing themselves.)

Think of the critical success factors for your company, and then choose impartial experts in those areas to be on your advisory board, Karofsky says. Example: You run a restaurant. One critical success factor is food; others are government regulation, marketing and location (real estate). "Once you get. a handle on critical success factors, you then go seek the best and the brightest who have the knowledge, skill and experience in those arenas," Karofsky says.

The advisory board adds knowledge, skill and experience that go above and beyond the family members. You need people who will tell the truth because they have nothing to lose. "Otherwise, you get in a situation where the king has no clothes. Everyone's afraid to tell the truth because they don't want to cut off the gravy train," Clark says. "You need to have people around you who you can trust to tell you what's in your best interest, not theirs."

Usually advisory board members are paid for their time. Karofsky recommends a prorated amount equivalent to the CEO's salary.

CREATE A STRATEGIC PLAN.

Strategic planning means creating a plan of action which, Hilburt-Davis says, should envision such issues as: Where is the business going? What are the goals? How will we get there? Who will do what? What are the time lines?

Strategic planning is especially critical for when there's a transition of leadership because, Karofsky says, "it you don't know where the business is going, how do you know what's expected of the next leader to get it there?"

MANAGE CONFLICT BY DOING THIS ...

A certain amount of conflict is healthy. Businesses need diverse opinions. The trick is to manage conflict. And you can manage it, Karofsky says, by managing expectations. There are two key pieces to this: 1) Anticipate someone else's reaction. If you're unable to anticipate someone else's reaction before you say something that may be volatile or testy, then don't just come out with it. 2) Anticipate the consequences. "I think we then move to try to give the other person the benefit of the doubt. Hopefully," Karofsky says, "we can minimize conflict."

In family businesses, "the relationships are more tender and deeper and the consequences are greater," he says. For instance, if you're rude to someone in the supermarket or in another car on the highway, that's one thing, but if you're rude to your sister, she's hurt. "There's much more at stake. The consequences are greater."

RESIST THE URGE TO RUSH TO A SOLUTION.

Does this describe you? Every time you see a problem, you try to solve it instantly. Resist that urge, Karofsky says. Instead, try to figure out what's really going on. When you hear about a problem, think, What caused that? Then, what caused that? Keep peeling back by trying to understand the cause. Then explore the options and talk about solutions. "It's like peeling back an onion," Karofsky says, "trying to get to the depth and the substance, the core."

COALESCE AS A FAMILY, SUCH AS BY TELLING STORIES AT PERIODIC FAMILY MEETINGS.

Stories of current and past generations are the way to get the message through to the younger generation about values, Karofsky says.

He often told his kids about March 1, 1959: "I woke up in the morning, and my house was quieter than usual when I came downstairs. My mom told me that, my dad's business had burned to the ground in the middle of the night. It was a five-alarm fire. We all got in the car and went down to see what was going on," says Karofsky, then 16.

His dad was already there. The teen ran up to find his father standing across the street from the fire and jotting notes on a clipboard. "What are you doing?" young Karofsky asked. "Making plans to order four 40-foot trailers filled with wallpaper to fill the warehouse on Wednesday," his dad replied. "But it burned down," the surprised teen noted. "Well, today is Sunday. I'll have a new location by Wednesday And when they're on the road, I'll call them and tell them where to deliver it," came the reply, as Karofsky recalls.

And so it was that the Northeastern Wallpaper Corp. in Boston got a new home on Tuesday, and the teen would grow up to work there for more than 20 years, ultimately as CEO. Moral: Instead of issuing dry commandments, tell stories. "I can tell my grandchildren to plan, or I can tell them that story," Karofsky says. "The story is indelible. ... That's how you get the message through about planning."

REALIZE THE KEY FACTORS IN A GOOD FAMILY BUSINESS ARE ... GOOD BUSINESS FACTORS.

A family business that's successful long term has a board of advisors and a board of directors, Clark says. They communicate the goals of the family and the goals of the business, and they run the business like a business.

Tell the truth. It's easier to remember, says Karofsky, who considers it one of his top essentials for a successful family business.

A major challenge in coalescing as a family is figuring out how to minimize the next generation's sense of entitlement--"a brutal epidemic in this country today," Karofsky says. "It's critical to help try to minimize that. We need to talk about it and help our kids understand that even though we've given them a lot, it's their turn to take over and their turn to earn."

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One strategy: Don't simply give the business to the next generation. It's "very important" the transfer involve a combination of a purchase by the younger generation and a gift, he says. "There are two kinds of ownership--there's a material ownership and there's an emotional ownership. Emotional ownership can come in a far deeper sense," Karofsky says, "when it's earned."

At Reynolds' Garage & Marine, which turned 150 this year, fifth-generation president Gary Reynolds says one secret to his company's longevity from its 1859 origins of building carriages to today selling and repairing cars in Lyme, Conn., is this: Each successive generation has had to buy the company from the previous one.

"Not that my father or any of the rest of them didn't give or help me do part of it. But it was a transaction, not a gift," says Reynolds, 65, whose three children work at the garage. "I paid my father $2,412.55 a month for more months than I care to admit. I think that's a reason that it's worked--at least you have to work for it."

A Closer Look: Crane & Co.

Staying Competitive During Changing Times

Lansing Crane saw himself as an outsider with insider credentials when he left his law career to become the sixth-generation CEO of Crane & Co., the fancy-paper company that since 1879 also has supplied the U.S. Treasury all of its currency paper (including that wad of bills in your wallet).

Talk about legacy: Paul Revere helped finance the American Revolution by engraving colony banknotes on Crane paper, and the Queen Mum announced her 100th birthday on Crane paper.

It would be tempting to rest on laurels. But Lansing Crane stresses the following critical factor for family companies to achieve success through the generations: Owners must stretch their strategic comfort zones. They must support the need to innovate continually.

At one point, 25 percent of his company's business was making carbon paper. What's carbon paper, you ask? Precisely. Suffice it to say, carbon paper became obsolete with the advent of photocopiers, just as demand for Crane's architectural drafting paper vanished with computer-based drafting, and demand for fine business stationery in this e-mail age has plunged.

So the company repositioned itself--growing its currency business internationally, and focusing more on personal stationery than business. The company grew from its niche as a New England product manufacturer to a diversified global organization under Crane's 12-year tenure (his cousin took over in 2007).

"To be successful, you have to be willing to take on reasonable risk," Crane tells SUCCESS. "Retaining the entrepreneurial, reasonable-risk-taking mentality is something that's very important." A multigenerational company that becomes insular and focused on past achievements "will decline, either gradually or rapidly, instead of growing and adapting by being refreshed and challenged."

A Closer Look: The Martin Guitar Company

Making a Generational Transition

Taking over the reins of a family business can be daunting, but that's especially true if disco and synthesizers are the rage and your business--making fine acoustic guitars--isn't. Chris Martin found himself in such a predicament when he became the sixth-generation CEO of The Martin Guitar Company.

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His parents divorced way back when he was 3. So even though he shares his name with company founder Christian Frederick Martin, "I didn't grow up in the family business," says Martin. Yes, at times he helped box strings, six to a box, as a kid. And the summer he was 18, he spent time learning every operation and helped build a D-28 guitar.

But it was only after studying business in college that he started working at Martin full time, learning the business from the ground up. At age 30 in 1986, a year into his position as vice president of marketing, he was named chairman and CEO. "Business was actually very difficult at that time," Martin recalls.

What to do? He considered what, in hindsight, were some mistakes his dad made--such as several acquisitions that hadn't panned out, including a drum-manufacturing company and a guitar factory in Sweden. The son sold them at a loss so the company could maintain focus.

The new CEO also wanted to change the culture--forget hierarchical management. He instituted profit sharing and encouraged employees to suggest ideas to improve efficiency while maintaining product quality. "You need to tap into the genius of the person doing the work," he says. "I've plowed most of the profits back into the business. ... I ask my colleagues: What do you need?"

They made some big changes: In the old days, guitar-making required keen woodworkers. To train new employees to that level of skill would take years. "We don't have time," Martin says. So he and colleagues developed a way to divide up tasks so that employees don't personally have so many complicated jobs to do in the process of making a guitar.

"The business is about four-times bigger than when I took over. It's not this little family business anymore. It's this big, sophisticated worldwide [operation]," he says. Asked whether he would like to see his daughter, now 5, as CEO some day, Martin says he doesn't want her to feel forced. He believes the company's board of directors and COO will keep the business on solid footing. Even if his daughter doesn't want to run it, he figures she still could be the majority shareholder and hire the right people.

After all, considering the growth the company has experienced during his tenure, "if I had to take over the business as it is today," he says, "it would've been much more difficult for me."

RELATED ARTICLE: 10 Largest U.S. Family Businesses

1. Walmart *--Sam Walton opened the company's first discount store in Rogers, Ark., in 1962; the company officially incorporated as Wal-Mart Stores Inc. seven years later. Walton passed away in 1992. His brother, James Lawrence "Bud" Walton, Walmart's co-founder, died in 1995. Today, Sam's billionaire sons, S. Robson Walton and Jim Walton, serve on the board (Robson as chairman).

2. Ford Motor Co.*--Henry Ford started the company in 1903, debuted the Model T five years later, and in 1914, "started an industrial revolution by more than doubling wages to $5 a day," states Ford.com. Today, his great-grandson, Bill Ford Jr., is executive chairman.

3. Koch Industries--oil, gas, agriculture, etc. Fred C. Koch developed an improved method of converting heavy oil into gasoline in 1927. Son Charles G. Koch has been board chairman and CEO since 1967. By acquiring Georgia-Pacific in 2005, the self-made billionaire "turned his family business into the world's largest private company," states Forbes.com.

4. Cargill Inc.--commodities trader. William W. Cargill started the company at the close of the Civil War (1865) with one grain storage warehouse in Conover, Iowa. Billionaire descendent Whitney MacMillan was the "last family CEO, but several family members remain on board," states Forbes.com. "All keep a relatively low profile."

5. Carlson Cos.--travel, hotels, restaurants. In 1938, Curtis Carlson took a $55 loan to start Gold Bond Stamp Co., whose stamps were given by merchants and gas stations to customers to build customer loyalty. The company expanded into hospitality in the 1960s and changed its name to Carlson in 1973. Daughter Marilyn Carlson Nelson today is chairman.

6. News Corp.*--media conglomerate. Sir Keith Murdoch built Australia's largest newspaper company and son Rupert took over (upon his death) in 1952; he remains its head. James and Lachlan Murdoch, grandsons of the founder, are current board members.

7. Comcast Corp.*--cable TV. In 1963, Ralph Roberts started the cable TV service in Tupelo, Miss. Son Brian Roberts today is president, CEO and chairman.

8. General Dynamics Corp.*--defense contractor. In 1899, Henry Crown, "peppery Chicago dealmaker," started his family's Material Services Corp. and built it into the world's largest building-supply firm, then sold it to General Dynamics in 1960 and became GD's largest shareholder, according to Family Business magazine. Grandson James today is a board member.

9. Bechtel Group Inc.--engineering, construction, etc. Warren Bechtel founded the company in 1898 as a railroad-grading operation in the Oklahoma Territory. Fourth-generation Riley P. Bechtel today is chairman and CEO.

10. (tie) HCA Inc.--hospital operator. The company was started in 1968 by three people, including Dr. Thomas Frist Sr. (dad of former U.S. Sen. Bill Frist) and his son Dr. Thomas Frist Jr.

(tie) Tyson Foods *--John Tyson made a living hauling chickens and other products for growers in Arkansas. In 1936, he "pioneered the first long-haul trip from Arkansas to the more lucrative Chicago poultry markets," says Tyson.com. Tyson Feed and Hatchery incorporated in 1947. Son Don Tyson controls a majority of shares, says WSJ.com. Current chairman John Tyson is the founder's grandson.

* publidy waded stock

Source's: Family Business magazine, company Web sites.