Millions of Americans have a dream to one day own a business. They also have a soft spot for family owned businesses. Approximately 20% of U.S. small businesses are family owned. We visualize this entrepreneurship as what built this country and made it successful. As a result, some people have a tendency to romanticize family businesses. While there are inherent strengths built in, there are also many family business challenges. Here we will discuss five of them.
5 Family Business Challenges
A family business is a company that two or more members of the family own, manage, and run. There are a wide variety of family businesses, large and small, successful and less successful. Some family businesses have lasted for centuries. Faber-Castell, for example, has been around since 1761. This is not the norm, however. The survival statistics for family businesses indicate that fewer than two-thirds of businesses run by families will last through three generations of leadership. In order for your company to be one of these, you will need to hurdle the challenges in your path. These include:
Company Culture – We’ve discussed family business culture before. A creative, energetic culture can be a great asset for a company. A rigid, stifling, or overly controlling business culture can also drive good employees away or limit their creativity and potential. It’s easy for owners to view how the business is run as normal and right and not realize that outsiders may see it completely differently. Family business owners must understand its underlying culture and how it affects their leaderships, their workforce, and their customers. They should work hard to both communicate what their company’s values are and also to listen when their employees come forward with questions or concerns. If the culture has underlying issues that cause problems for the company as a whole, it will need to change.
Nepotism – This is another issue that causes tension between family members and non-family employees. It’s very true that in many family businesses, the family members work harder than other employees. Plenty of other companies, however, hire on children, siblings, or cousins and allow them to do the minimum and still get paid or advance. It can also be challenging to get rid of family employees when they fail to do their jobs.
Left unaddressed, nepotism in a company can depress morale and loyalty. Employees will believe that family members will get better treatment and higher compensation for the same (or less) work. You do not want your employees to feel resentment or even contempt for the members of your family who work in your family business. The solution is for the company leaders to create policies that allow for fair compensation and a competitive atmosphere that rewards on merit. If you cannot get rid of a family member, it’s also possible to offer additional training or position them where they can do less harm to the company.
Compensation – Related to nepotism is compensation. If company leadership wants to encourage family members to work hard for their money and pull their weight, they will tie compensation to market value. Paying them for not working or for poor performance will destroy trust and morale and drive good workers away. You must make it clear to everyone that your company offers a level playing field for success. Salary and benefits should be set according to the job position and performance over time, and family employees should be evaluated according to the same standards as non-family workers.
Strategic Planning – Family businesses have a tendency to be focused on doing what is necessary to keep the doors open today. Few of them do the planning, strategic or financial, needed to succeed long term. Many family businesses are small or mid-size and do not have a board of directors, so they don’t have anyone keeping them accountable or asking questions about the value of the company or its growth strategy moving forward.
Shifting planning can also be a challenge for younger generation family members who are stuck with a blueprint their predecessors used to run the company – one that no longer fits the current time or conditions.
Succession Planning – Finally, there’s succession planning. It’s all too common for older generation leaders to fail to plan sufficiently for their eventual retirement or to prepare their children for the leadership roles they will need to fill. While succession planning is crucial for all business owners, there are so many more complicating factors involved with transitioning leadership to a family member or members. Succession planning should be done well in advance of any exit. It’s a process, not an event. It requires creating a written exit plan and making legal and financial arrangements well in advance – if the owner wants to see the company and his children succeed without him.
Succession planning requires both planning and communication. That can be hard for many business owners. Working with family adds an additional layer of complication. If you recognize any of the family business challenges listed above in your business and would like help addressing these issues before they become problems, call us at Prometis Partners. We help family businesses become stronger and build value so they can become success stories instead of one of the many companies that closes its doors when the owner retires.