Family Business September 17, 2020

The Advantages and Disadvantages of a Family Business

Family-owned companies are good not only for the families involved, but also for both the local and global economies. However, many find it hard to survive. Around a third of the 100,000 family businesses that are passed to the next generation each year subsequently fail, while many small business owners struggle to ensure that they are financially independent from their businesses when they retire.


There are advantages and disadvantages to running any business, from a small business to a larger, publicly traded company. However, family firms come with their own unique advantages and challenges. Here we delve into the pros and cons of running a family business, along with tips to capitalise on the positives, and overcome the negatives.


What are the advantages of a family-run business?


There are many advantages to running a family business, such as:

Stability

The leadership of a family business is normally determined by the position of each individual in the family. As a result, there is generally longevity in leadership, which ensures overall stability within a family-run business. In many family-owned companies, the business leader will stay in the position for many years, with life events - such as illness, retirement or death - being the trigger for change at the top.


Commitment

Family firms tend to have a greater sense of commitment and accountability at their heart than non-family firms, as it is not just the needs of the business at stake, but the needs of the family too. This desire for both the family and business to stay strong fosters additional benefits, including a greater understanding of the industry, the organisation and the job; stronger customer relationships; and more effective sales and marketing.

One of the oldest surviving family businesses in the world is Hoshi Ryokan: a Japanese inn-style hotel which was founded in 718 and which has been in the same family for 46 generations. This longevity has led to an incredible understanding of the business and its history, which anyone outside of or relatively new to the business would simply be unable to replicate.

Elsewhere, the Ford Motor Company managed to stay afloat during incredibly tough economic times, when other large businesses like Chrysler and GM were desperate for bailouts. It is likely that there are several reasons for their success, but with the Ford family’s name, reputation and financial standing on the line, it is likely that this encouraged their fighting spirit.


Flexibility

Working in a family-run firm requires a lot of flexibility. While non-family businesses tend to have very clearly delineated responsibilities for every role, family members will sometimes be required to wear several different hats, taking on tasks outside of their formal remit where needed.

In a now-famous quote, Estée Lauder, who formed the famous cosmetic firm with her husband in 1948, once said of her company’s success, “I have never worked a day in my life without selling. If I believe in something I sell it, and I sell it hard”. The only woman on Time magazine’s list of the century’s business geniuses in 1998, Lauder was involved in every element of her business: preparing pots of face cream, giving free product demonstrations, designing product packaging, training saleswomen and more.


Long-term outlook

Non-family firms draw up their goals for the next quarter. Family firms, however, think years - or even decades - ahead. A longer-term perspective is a good way to foster a culture of clear strategy and decision-making throughout the business.

Second-generation CEO of German multi-billion dollar retailer, Otto Group, has used this long-term outlook for serious success. He took over the business - founded by his father in 1949 - in 1981, and almost immediately began to investigate the possibilities that computer technology could offer. As a result, the brand moved into ecommerce in 1995, becoming profitable in its online sales activities by 1998. The company has never been publicly traded, and still remains a family affair.


Decreased cost

Economic downturns and other challenging times can be a struggle for many businesses, where the board of directors needs to work out how to keep the business afloat while still paying staff. In family firms, however, it will often be the case that family members are willing to contribute financially to keeping the business afloat during times like these.

It may be that this involves taking a temporary pay cut, contributing some of their own finances, or pausing the payment of dividends while the company gets back on its feet. For the family behind the business, long-term business success is crucial to their financial survival, which gives more flexibility where finances are concerned.


What are the disadvantages of family-run businesses?


While it is clear that there are plenty of benefits to family-owned companies, they also have their downsides:

A lack of family interest

In a family business, there can be a great deal of pressure on future generations to keep the business going, even if they have no real interest in doing so. This can result in a workforce - or worse, a management - consisting of family members who are apathetic, unenthusiastic and disengaged.

In any other business, it is likely that such an approach would see employees having their contracts terminated. In a family business, this is more of a challenge.


Conflict between family members

The dynamic between different family members, family (and business) history and a blurred boundary between family life and work life can all cause conflict within any family-run business. And the family connections can often make such issues difficult to resolve.

When Dhirubhai Ambani, founder of Indian petrochemical manufacturing company Reliance Industries, died in 2002, he left no will. His older son, Mukesh, was made chairman and managing director, while younger son Anil became vice-chairman. The feud between the two brothers became public and, in 2005, their mother demerged the company, leaving Mukesh in charge of the petrochemical business, and Anil responsible for Reliance Energy, Reliance Communications and Reliance Capital.


A lack of structure

Family businesses rely firmly on trust - but trust alone may not be the best way. It is still vital to take rules seriously - both internal rules, and external corporate law.

In 2008, Samsung Group chairman Lee Kun-Hee was forced to hand in his resignation after being convicted of tax evasion, in addition to being investigated for selling stock to his son at unfairly low prices - demonstrating how good structure and management can make an enormous difference.


Nepotism

Some family businesses can fall into the trap of promoting family members to senior management roles, even when it may be clear that the individuals within these roles do not have enough education, experience or skills to fully embrace their responsibilities. In these situations, it would be far more sensible to place more qualified non-family members in these positions - but is this possible without causing friction within the family?

While it can be a challenge to balance family relationships and expectations with finding the right person for the job, a lack of competence at a senior level can have a huge impact on a company’s success, as well as on talent retention.


Succession planning

Research reveals that 62% of employees say they would be “significantly more engaged” with their role if they knew their employer had a clearly defined succession plan in place. However, many family business owners fail to create succession plans, be this whether they feel that it is not needed until further down the line, or because they refuse to admit that the time will come when someone else will need to take the reins.

The reality is that illness, death or even scandal can require a family business to appoint a successor in a very short space of time. Without the right plans in place, it can be very hard for a business to move forward in such an event.

While family-owned companies clearly have plenty of advantages, their very nature can also make sustaining them in the long-term a challenge. The goal for any family business owner should, then, to be clear about what the strengths and weaknesses of a family business can be, in order to determine how to ensure future success.

 

Key Considerations:

  1. Build a long-term vision for the family business that is compelling and gives purpose to why you are doing this.
  2. Consider the type of family business structure you want to build and test out whether it can last three generations.
  3. Understand what family conflicts are brewing that need to be resolved with some professional mediation and coaching. In a future article, I’ll introduce you to the DNA Model. I’ll show you how to ensure you have all the strands necessary to develop a successful business and how to weave those strands together to ensure your business is strong, enduring, and successful.

These three considerations are an extract from a book by global family business advisor, Reg Athwal - Unleash Your Family Business DNA: considerations for family businesses that will help to ensure their survival. But what do they actually mean? Inspired by Reg, here are our thoughts.


How can I build a long-term vision for a family business?

For any business, a large part of future success will be down to creating great products and services, as well as drawing up a business plan that is flexible enough to move with any market changes. However, in family-run businesses there is another vital consideration to make: ensuring that the next-generation talent is there, and that it knows what to do and how to do it to continue the business’ growth.

Some businesses may be fortunate enough to have the next generation raring to go and with the skills and attitude needed to take the business forward. Others may have family members who are keen but who they do not feel are right to take on the business going forward, while others may have a next generation who simply has no desire to continue in their family’s footsteps.

The key to developing the next generation of talent is to start early. Each year, approximately 100,000 family businesses are handed down to the next generation - and around a third of these businesses will subsequently fail. Part of the problem is a failure to plan early: by deciding on your successor early and briefing them on their hypothetical role, you will ensure that they are ready for the switch and know what to do, whether they take the reins next week or several years down the line.

It could be that you create a “family council” - separate from business leadership meetings - where you discuss the business, its objectives, its issues and more with the entire family, so that everyone is aware of its current and likely future position. It could be that children are brought into the business in their secondary school years to shadow existing team members. Not only will this ensure that the whole family has a better understanding of how the business works, it will also help you to establish which of the next generation will be a good fit for the company.

Whatever you do, it is also important to document your succession plan, your company goals and more so that when the time comes, the takeover is as smooth as it can possibly be.


Which structure is right for my family-run business?

A successful family business will need to be built upon an appropriate structure - and this structure may shift as it moves from generation to generation, or as the market evolves. Generally, there are five different business structures that a family business will choose from:

  • Owner-operator. A business with a single owner, who runs the day-to-day operations of that business. In family businesses, the challenge here can be in deciding fairly who will take over this role when the current owner-operator retires. 
  • Partnership. An approach where two or more partners have ownership of the business, and these owners are the people who benefit from any profits. While it works well for some family businesses, determining who will succeed current partners can be problematic.
  • Distributed. A popular model for many family businesses, the distributed model avoids the tasks of having to choose new partners as successors. Instead, business ownership is passed down to the family’s descendants - whether or not they actually work within the business. However, the family may define a compensation policy that ensures that those who do contribute to the success of the business are better rewarded. However, the very existence of such a compensation policy can cause arguments between those who are involved in the business, and those who aren’t.
  • Nested. “Nested” refers to the fact that in this type of business model, certain assets are owned by individual branches of the family, with other assets owned by the family as a whole. The core business is run as a profit-making enterprise, with dividends paid to the family branches so they can create their own profit-making ventures. While it can be a good approach to reduce tensions between family members, some may find that it can be a challenge to balance the needs of the core business with the dividends being paid to the smaller operations.
  • Public. This model may mean that some or all of the shares in the business are traded publicly. However, it may also mean that the business simply behaves like a public company, with business owners playing a minimal role, and professional managers brought in to run the business. This approach can work well when the business is looking for a large amount of external funding, or when its owners simply don’t have the time, resources or inclination to be involved on a day-to-day basis. However, it may not work so well if the owners want to maintain significant control over how the business is run. 
Once a business model is chosen, it can be changed - and some family business owners will change their approach should they feel that the business has stagnated, or that developments within the family require it.


How can I best resolve conflicts within a family-run small business?

Conflict is likely in any business setting. However, in family businesses - where personal histories, family relationships and potential quarrels between family and non-family staff can be involved - conflict can often be far more difficult to manage, and far more detrimental. Without handling disputes and conflict within a family business carefully, they have the potential to become far more serious problems, impacting on both the business itself and family relationships. While the ideal solution would be for these conflicts simply not to occur, this is unrealistic - which is why it makes sense to have formal processes in place to deal with disagreements as and when they arise. 

There are a number of strategies that family-run businesses can adopt to ensure that conflicts are recognised, aired and resolved before they become too great:

  • Regular communication. By fostering an environment where all employees are encouraged to communicate about issues they face, speedy resolution is more possible. In some businesses, however, it may be that certain team members would prefer a more formal way of communicating their concerns, which brings us on to…
  • Family councils. Family council meetings offer a formally structured means of expressing concerns, issues or anything else that family members want to discuss with the wider business. It may be that these councils include management, it may be that they are designed as a space where people can discuss issues without management’s involvement: different solutions will work for different businesses. The important thing is to ensure that your family members within the business know that they can safely air any concerns, and that they will be listened to with no judgment.
  • Separating work life and family life. In a family business, keeping work at the workplace can be a challenge. However, keeping work life and home life as separate as possible can help to reduce the likelihood of serious family conflict. Some businesses choose to make certain times of the day “no-business zones”, or set ground rules that say that business issues can only be discussed in the workplace and not at home.
  • External mediation. If a conflict has reached the stage where it seems unresolvable, then bringing in a trained mediator can make a big difference. An external mediator will help a family to discuss issues without emotion clouding judgments, focusing on the key issues that need to be addressed for the conflict to be resolved. 

Every single family firm will come with its own set of unique advantages and challenges. But in order to be successful, business leaders must capitalise on these advantages, and overcome these challenges to avoid becoming one of the 70% of businesses that does not survive past the first generation.

Peer support from other family business owners can be an incredible way to push your own family business forward. Join Vistage today to benefit from our diverse, experienced network of members and mentors.

Image: Unsplash - no attribution needed

Free eBook - Family Business

 

Our gift to you...

Apply now for your personal leadership consultation with a Vistage Chair. They'll help you assess areas of strength of your business and identify areas of potential growth.

Apply Now

    Subscribe to Vistage Insights