Family businesses cannot be ignored. It is reported that up to 80% of businesses in the world are family businesses. In the US for example, 35% of Fortune 500 businesses (500 largest companies in the US as listed by Fortune Magazine) are family enterprises; 60% of public listed companies are family businesses, and 60% of employment is generated by family-owned businesses.
Some family businesses have become great multinationals and brand names globally today. I believe you can name some around your location in whatever part of the world you are in. You might even be enjoying their products and services as you read this. These businesses indeed mean a lot to humanity and the local and international economies.
The issue is this. Despite the importance of these businesses, family businesses globally have unique challenges or problems that non-family enterprises do not normally face. I would like to identify the top 10 challenges for family-owned businesses. If you are running a family business, or are planning to start one, it’s important that you know these challenges so that you devise strategies to handle them otherwise they will handle you. So, what are the most common problems, challenges or threats to family-owned businesses?
- Rivalry, conflict and related family issues such as excessive emotions and personalization of matters. These are very common issues in family businesses. Rivalry and conflict over power and control, money etc. are common. They tend to be worse in small businesses. It’s not a surprise at all if people start even comparing and competing with each other in terms of benefits, roles and responsibilities, power etc. Oftentimes there is disharmony and tension that negatively affects decision-making and implementation. Excessive emotional displays are common and yet those very people (most probably relatives) would keep their excesses intact if they were working for strangers or large corporations they don’t know well, or in corporate settings with work as the main business, and no nonsense is entertained. If you have ever experienced the environment in small family businesses and compared it with large corporate settings I guess you have a good idea of what I’m talking about. It’s usually in small family businesses where people can comfortably carry family problems straight and with ease right into the office – sometimes without blinking an eye.
- Employment of relatives. Now Mr. Entrepreneur, I’m not against you employing your niece, brother, and cousin’s sister-in-law or whatever. You can even employ the family cow if you like. Just get me right here. I’m simply saying that employment of relatives is a common problem in family businesses. Why am I saying this? Oftentimes entrepreneurs do what borders on nepotism and end up engaging untrained or ill-trained, unqualified, unskilled, talentless and inexperienced relatives in the name of recruitment of staffs. The adverse effect of this on the business can be enormous. There is sometimes pressure to employ such people, without critical thinking of the impact on the business. Extensions of this problem include issues about fair/unfair remuneration, compensation and retirement planning, difficulty of controlling such staffs etc. These relatives might generate for you more than enough of the items I mentioned in my first point above. If you want to avoid those problems, be smart!
- Uncontrolled drawings. Family owned businesses also face uncontrolled drawings or withdrawals of money from the business, as a common problem. First of all, there is the issue of sheer financial indiscipline and since the family setting means little checks and balances, this can be a challenge. You may find one person controlling the checkbook and bank account, rendering the rest to survive at his or her mercy. Critical business issues such as procurement, operations, salary payments, loan repayments etc. suffer as a result. Secondly, sometimes you find competitive drawings and greed at play. Thirdly, no orderly distribution of gains that the business makes. In non-family enterprises the owners, shareholders, partners etc. usually are sane and patient enough to wait for some form of fair or statutorily controlled distribution of profits after external audit blah blah blah. Not the case always. Dividing the pie can be a challenge especially for small and medium family-owned businesses. Sometimes people box and abuse each other in this. Come on. I’m not joking. It happens in the real world. Not in movies only. Do you doubt it?
- No clear control and poor internal controls. Another top challenge family-owned businesses face is the aspect of poor control of the business. Sometimes it’s not easy to tell who is in charge. This is worse when there is a rivalry. The ‘Manager’ may not really be in control, as he might often be required to consult some elderly person who might even have no clue about modern business dynamics and realities. There is also the problem of too much trust as the system is closely knit, with no or limited checks and balances. Collusion for anything is easy among relatives. These are recipes for occasional disasters as some of the family people take advantage of this situation and wreak havoc on the business. Haven’t you heard of such havocs tearing some family businesses apart? If you are in there as a key decision maker, and you are faced with a close relative who has swindled tens of millions, you might even be reserved to prosecute and jail that errant ‘staff’ in that business. Do you understand me?
- Succession planning challenges. This is another grey area in most family businesses, hence a common challenge. In many cases, there is no planning regarding who will take over. Sudden exits of key decision makers, arising from death, incapacitation etc. can be disastrous to the enterprise. Even when it is decided that the business should be sold, oftentimes this process brings more confusion. Retirement issues also come into play. While many non-family businesses can easily maneuver their way around succession challenges most times, family businesses often cannot. Occasionally you find one seriously unfit member of the family or relative taking the reins of control, sometimes followed by trial and error approaches with frequent and swift executive changes that send wrong signals to the market and waters down the image of the entity.
- No strategic and visionary approach. Lack of a strategic and visionary approach to business management is also a common challenge to family-owned enterprises. Important business issues could be managed with a short-term and not long-term focus and approach. As an example, the need to develop a 10-year strategic plan might be brushed aside. Likewise might be the need for determining the vision and mission of the enterprise, or carrying out a SWOT analysis. This is worse when clueless relatives are the drivers of the business. Many family enterprises also suffer from informality and lack of objectivity, remaining entangled with traditional approaches to issues. Such strategic voids have many negative impacts on the business. Unique cultures such as greeting everybody individually and elaborately in the morning or telling everybody that you are leaving office in the evening is not uncommon. While not entirely bad, such cultures have their drawbacks.
- Difficulty in attracting and retaining good external human capital. Another top challenge in family-owned businesses is the difficulty in attracting and retaining high-quality human capital from outside the business or outside the family and relatives networks. The environment may not be very friendly to outsiders. Family quarrels and differences sometimes spill over to the office and injure innocent staffs in different ways. Unfair and biased treatment of staffs including lack of promotion of the not-so-close staffs might occur. Trouble-causing relatives might need careful managing. The unwarranted firing of employees by power brokers might occasionally occur. These do not provide a good environment for top-notch human capital from the labor market; people that could create big positive impacts on the said enterprise.
- Generational conflict. The dot.com generation or Generation X vs old school guys normally brings issues. In this age, even large non-family corporations are struggling with this phenomenon. The very old and the very young look at strategies and tactics very differently. Even general management of things in the businesses is done differently. The older often find comfort with the status quo while the young want change and adventure. Just imagine a scenario of a board meeting or senior management meeting of a family business with any two members having about 40 years age difference between them. Do you understand what I mean?
- Growth challenges. Growth is another top challenge in family owned businesses. In some family settings, some members may be reluctant to invest in the business. Even calls to reinvest profits generated by the business can sometimes be vehemently objected to and fought by those who want to enjoy the reward now instead of delaying it. Limited capital among family members, coupled with reluctance to borrow due to fear and exposing family wealth or assets to the banks, can be a limiting factor to growth. Informality may make banks reluctant to aggressively finance such enterprises unless there are other guarantees and comfortable checks and balances, and yet these enterprises may not have such. Non-family businesses on the other side usually move boldly to confront their growth challenges and this gives them an upper hand.
- Comfort zone. Finally, but not the least, many family businesses operate continuously within their comfort zones. Some desire to have just enough to spend and survive on. The appetite for aggressive profit-search might be lacking. Many intentionally stay small so that they can easily control the business. Most things are done in a measured way with minimal risk-taking and yet risk and reward are inversely related. Enterprises that engage in higher risks usually make more reward while the reverse is true for those that are risk-averse.
The above are the top or most common challenges of family-owned businesses in whichever part of the world they exist. However, it is also worthwhile to note that some of the big corporations and multinationals we see today started as family businesses and some are still family owned. They simply became smart enough to overcome the above challenges hence their huge success in the global business arena. Therefore don’t lose hope if you are running a small family business and you are struggling under the weight of some of the above issues.
With every good wish to all family-owned businesses worldwide,
The Wise Entrepreneur