Family-owned businesses are often celebrated for their contribution to the community and the global economy. They are often looked at as the backbone of society. For members of the family, these businesses serve as an example of the family’s values, strength, and ingenuity.
In the U.S., family-owned businesses employ 60% of the workforce and create 78% of all new jobs. Needless to say, family-owned businesses work together and create a legacy. These businesses also help to grow the economy and help others. While family involvement can be a significant strength, it often brings complexities. If not addressed, they can become detrimental to both the business and the family.
There are many things within family businesses that a person should consider when launching their own family-owned business. In this article, we’ll highlight some of the most common challenges of running a family business.
1. Mixing Personal and Professional Dynamics
One of the most prominent challenges in a family business is the intertwining of personal and professional relationships. It can be difficult to separate family dynamics from business interactions, and conflicts in one area can spill over into the other.
For example, a disagreement at the dinner table might manifest in decision-making at a board meeting. Similarly, professional competition between siblings can strain their personal relationships.
2. Succession Planning
Questions arise: Who is most fit to take over? Should leadership only remain within the family? How does the business ensure a smooth transition, and how does it manage potential feelings of resentment or rivalry among family members? Over three-quarters (76%) of family enterprises in 2023 are more than 50 years old. This means that successful family businesses need to think about the next generation of members that will carry on the legacy.
One of the most crucial, yet often contentious, aspects of a family business is succession planning. While corporations might follow a structured process for leadership transitions based on merit and experience, family businesses introduce emotional and legacy considerations into the mix. There’s the challenge of identifying a successor who not only has the competence and vision to lead but is also accepted by the family.
This becomes more complex when multiple family members view themselves as the rightful heirs to leadership. Additionally, the outgoing generation might struggle with letting go. Especially if they’ve built the business from scratch. Proper succession planning requires early initiation and open communication It can sometimes even involve external mediation. It’s also beneficial to have a structured training and mentoring process for potential successors.
3. Balancing Tradition and Innovation
Family businesses, especially those spanning multiple generations, often have deeply ingrained traditions that have been the cornerstone of their identity and success. However, in an evolving market, adherence to tradition can sometimes stifle innovation. The challenge lies in respecting time-honored practices while being agile enough to adapt to modern demands.
It’s a delicate dance; businesses that overly fixate on tradition risk becoming obsolete, while those that change too rapidly might alienate loyal customers and even family members. To strike this balance, it’s essential to build a culture of continuous learning within the family business. Encourage both older and younger generations to share insights, explore new technologies, and collaboratively chart the company’s future path.
4. Financial Pressure and Shared Wealth
The mixing of family finances with business revenues presents unique pressures. In non-family businesses, profit distribution, reinvestments, and fiscal decisions are primarily business-driven. However, in a family-owned business, they directly influence the family’s collective and individual financial well-being. If the business faces a downturn, it’s not just a corporate loss, but a direct hit to the family’s livelihood.
Decisions about reinvestment versus dividends can lead to conflicts. This is especially true if some family members rely heavily on business profits for personal expenses. Establishing a clear financial policy, possibly with external financial advisory, can help in making objective decisions and setting expectations about wealth distribution among family members.
5. Setting Boundaries
It’s easy for work conversations to permeate all family gatherings, leaving little room for genuine personal interactions. This constant immersion can lead to burnout and harm familial relationships.
The overlapping of family and business roles means work often seeps into personal spaces. It’s not uncommon for business discussions to dominate family gatherings, blurring the lines between professional and personal lives. This lack of boundaries can lead to burnout and can strain familial relationships.
The challenge is to set clear demarcations, ensuring that family time remains sacred. This might involve setting specific ‘no-business-talk’ periods, like during family dinners or vacations, or designating certain areas in the family home as business-free zones. Creating such boundaries not only preserves the sanctity of personal relationships but also provides a mental break, ensuring family members approach business challenges with a refreshed mindset.
6. Employment Policies in Family Businesses
The intricate landscape of family businesses often makes employment policies a particularly sensitive area. In typical corporate settings, hiring, salaries, promotions, and firing decisions follow established HR protocols. However, when the potential employee is a cousin or a sibling, objective decision-making becomes intricate.
Family members might assume they have an inherent right to positions within the company, but this can be a double-edged sword. On the one hand, it ensures loyalty and a deep-rooted commitment to the business’s success. Conversely, it can inadvertently lead to nepotism, potentially overshadowing more qualified non-family candidates. There’s also the emotional and relational cost to consider. How does one reprimand or, if needed, dismiss a family member who’s underperforming without causing a rift in the family?
Establishing clear employment guidelines, which treat family and non-family members with equal fairness and rigor, is crucial. These policies not only maintain professional standards but also safeguard family ties from potential strains related to work disputes.
7. Differing Visions and Goals
The challenge of aligning visions and goals isn’t unique to family businesses, but the familial dimension adds layers of complexity. As generations shift, so do perspectives. The older generation might prioritize stability and legacy preservation. But, the younger might lean towards innovation and market expansion. These differences aren’t just about business strategies; they’re intertwined with personal identities and the desire for individual legacies.
These generational divides can result in disputes that slow decision-making or lead the business down conflicting paths. Open dialogue is crucial. Regular family meetings, where business strategies are discussed openly and every member, irrespective of age or position, gets a say can be instrumental. These forums can help in understanding different viewpoints which can help find common ground about the business’s future.
8. External Perceptions
Some issues experienced in a family business do not come from internal issues but from external ones. Family businesses often grapple with external perceptions. For example, one stereotype is viewing them as less professional or less forward-thinking compared to corporate entities. This perception can influence potential clients to investors.
These stereotypes stem from the belief that family businesses prioritize personal relationships over professional competence. This can impact trust.
When a customer does business with a larger company and experiences issues with a representative, they can escalate the issue to management. They know that because the larger company has standards that there may be coaching or extra training given to the representative so that they can improve their interactions with customers.
This isn’t always true with a family business. Let’s say a customer decides to do business with a family-owned company and experiences a customer service issue. That customer may feel less confident that the person they were dealing with will receive any disciplinary actions or course correction.
To counteract this, family businesses must consistently project a professional image. This entails not only upholding high standards in operations and deliverables but also in communication and branding.
9. Relationships with Non-Family Employees
One of the most delicate issues in running a family business is the relationship owners and employees have with non-relative employees. Nepotism, the favoring of relatives or close friends in professional settings, runs rampant in some family businesses. Even slight nepotism can damage employee-owner relationships.
For non-relative employees, the effects of nepotism can be palpable. Witnessing less qualified family members advance can erode morale and motivation. If their hard work and competence seem secondary to family connections, their drive to excel could diminish. This dynamic might also affect talent retention. If high-performing individuals feel their potential is capped due to familial favoritism, they may look for opportunities elsewhere.
Also, an overarching culture of nepotism can disturb workplace dynamics. This creates an atmosphere where divisions based on family affiliations overshadow merit. This is the “in-group” versus “out-group” dichotomy. And, it can harm team cohesion, collaboration, and overall productivity.
Also, non-relative employees might feel their avenues for professional growth are limited. This tends to alter their aspirations and leading to a homogenization of skills and perspectives within the company. In essence, while family-owned businesses have inherent strengths like deep-rooted loyalty and shared vision, unchecked nepotism can introduce significant challenges.
10. Departure of Family from the Business May Strain Relationships
There are times within a family business when one member of the family needs to leave. This could be because of performance or a violation of some kind. It could also be because the family member wants to do something different with their life. When this is the case, the departure may strain the relationship between the person leaving and the other family members that are still with the business.
Sometimes, a family member leaving the business could be seen as a betrayal. In the same way, a member being let go of the business may be seen as a type of rejection or ex-communication. Usually, when a family employee leaves the company it is never an easy thing to accept.
The key is to create an understanding with each family member about the reasons for the departure. It is also a good idea to keep lines of communication open between the two parties. This will help mend any broken relationships.
Running a family business brings a mix of challenges that arise from the close intertwining of family dynamics and business operations. However, with clear communication, established boundaries, and a commitment to both the business and family’s health, these enterprises can thrive across generations. Address these challenges head-on. This will ensure that the business remains resilient. And that the family bond stays strong.