Family business need not be family feud.

Running a business is hard. Dealing with family can also be hard. So it holds to reason that running a family business can stress the ties that bind to the point of breaking.

Still, there are more than 13 million businesses in the United States that are considered family-owned. That's more than 80 percent of all the businesses in the U.S.--and construction companies account for 12 per cent of these family-owned businesses.

Only 40 percent of the companies passed from the first to the second generation succeed. Second to third generation businesses have a mere 15 percent chance of success. And for those rare breeds that try to squeeze one more generation in on the game, the success rate is a paltry 1 percent, according to the National Family Business Council.

Regardless of the industry, the causes for conflict in family-owned business are as complex and varied as families themselves. But there are a number of sources unique to the construction industry that can fuel the family fire such as job site disagreements, conflicting management styles, poor accounting and record-keeping, and disagreements over the bidding process and job procurement.

There are broader issues that can emerge in any family-owned business. The vision for the direction of the company can vary from one family member to the next and from one generation to the next.

Then there is the nepotism factor. If employees feel that family members are overpaid or underworked (or both), resentment can grow and lead to more widespread discontent throughout the company. Add to that the inevitable personal issues that arise between family that can interfere with work, and you've got a very tricky road to navigate.

Most experts agree that avoiding conflict within family-owned businesses comes down to setting clearly understood expectations among everyone involved. For some business owners that means treating children just as they would treat any other employee, making them work their way up through the ranks, learning the business from the bottom up. That means the child or grandchild learns all areas of the construction business from digging holes, hanging drywall, managing crews, working on equipment, dealing with clients, or dealing with vendors.

For others, that means applying a clear and concise compensation policy to all employees, including family members. That compensation policy should be based in industry and market standards, not family relationships. Clear job descriptions should also be in place for all positions in the company, including those held by family and non-family members.

One of the best ways to manage expectations between family members is to develop a rock-solid buy-sell agreement. Think of a buy-sell agreement as the prenuptial agreement of the business world. It is a way of ensuring the continuity of the business in the event of any number of changes: death; disablement; retirement; or any other kind of withdrawal from the company. It is also an effective way to achieve a smooth succession from one generation to the next.

When drafting the buy-sell agreement, the first step is to agree on what kind of actions will trigger the agreement. For instance, it may include death and voluntary withdrawal, but not termination. Obviously the owner or owners of a family business will have the final say in this matter, but he or she may want to consult other interested parties, like heirs and other family members, so that there are no surprises.

The next step is to determine how the former owner's interest will be purchased after the agreement is triggered. This process can take many forms. For example, in a cross-purchase agreement, the remaining owners can buy the former partner's interest. In a redemption agreement, the company itself can redeem the interest. Or the company and owners can split the interest.

How ever an owner chooses to set up the purchasing agreement, it's important to realize that there are critical tax implications for each arrangement. For that reason, owners of family businesses often choose to gift relatively small amounts of stock to their offspring over a long period of time (usually in $10,000 increments annually), thereby gradually transferring ownership of the company to their children without the heavy tax penalties.

It is also important to stipulate how the company will be evaluated (earnings, book value, or independent evaluator) and how the terms and structure of the payment will be set. Again, there are a number of tax issues here, depending on the legal structure of the company.

Of course, it's not all about avoiding family conflict. There are other reasons that having a firm succession plan and buy-sell agreement in place can help the successful construction company remain that way. Well-documented, legally-binding buy-sell agreements tend to increase the actual value of the business. Lenders and potential buyers think less of a company with uncertainty about its future ownership. That means that communicating and planning these agreements needs to be an ongoing process.

Even the savviest business people can fail victim to the family trap. But with the right financial and legal counsel, an unambiguous buy-sell agreement, and a healthy dose of honesty and regular communication, running the family-owned construction business doesn't have to result in a family feud.

BY MARC NEWMAN, CPA 

ANCHIN, BLOCK & ANCHIN LLP