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Advantages and Disadvantages of a Family Business

One of the laws of Isaac Newton states that “To every action, there is an equal and opposite reaction.” This law is very true and applicable to the business world. No matter how good a decision or a business idea may seem, there is always a corresponding downside. Now what are the advantages of starting a family business? What are the corresponding disadvantages? Well, i advice you read on to find out.

The idea of building and running a business with your family is thrilling. In fact, most experts even recommend building a business with your family because it keeps the family together and maximum efficiency is ensured. Even Warren Buffett has invested in several family businesses on different occasions and some of the world’s most successful businesses started as a family business.

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Consider the Walton family, the Koch brothers, the Ibru family, the Ambani family, the Dantata family, Carlos Slim and family, the Rothschild family. Even the most successful crime organizations are run as a family business. However, even a family business has its own disadvantages.

Six Disadvantages of Running a Family Business

In a family business, there is a risk that your family interests would be mixed with the corporate interest. Misunderstandings at home could also be brought to the office and the family expenses could be deducted from the business. However, some businessmen have solved the problem. Take it from Abdulrahman Al Zamil, chairman of Al Zamil Group. He supports transparency and even came up with documents to separate the interests of family and business.

  • Poor performance

One truth about running a family business is that some of the family members might become too comfortable, knowing that they are in the business with the people closest to them. The result of this nonchalant attitude is poor performance, lack of formal planning and budgeting.

  • Management with Sentiments

Family businesses also tend to appoint family members even if they lack training or experience. The head of the family wants to turn over the business to his first son or favorite child, even if such a person is not competent. Take for instance the chairman of Kikkoman Corporation, Yuzaburo Mogi, he went to Columbia University to get a degree so as to avoid ruining the business.

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He is even the first Japanese to get an MBA from the said university. To further curtail the risk of ruining the family business is to take a cue from Mayer Amschel Rothschild, who delegated duties to his children according to their strengths, skills and weaknesses.

  • Lack of openness

Another big disadvantage is that there is a temptation of keeping the business to the family. Most family businesses are tightly run by the family and very few outsiders. Now outsiders may work in the business but they won’t be in the top management or have decision making control.

Note that outsiders might have ideas and skills that can be useful to the family business but their ideas won’t be incorporated because they are outsiders. Take it from the Auchan Group which is owned primarily by the Mulliez family, while about 12% of shares are owned by the employees.

  • Rivalry between family members

Of course, not all family businesses succeed all the time. If it goes down, there is a risk that family members start to hate and blame each other. If the head of the family dies, there tend to be fighting and scrambling for the business assets among the kids. Even when the head of the family writes a will and split the assets accordingly, there still tend to be hate and rivalry.

  • Lack of business continuity or successful succession

Most family businesses lack a continuity plan. The business is run entirely by the family that the head feels that the smooth operation of the business will continue even after his demise. Lack of a succession plan is the reason why most family businesses don’t survive after the death of the founder. The founder’s survivors usually lack the competence and passion to run the family business.

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Five Advantages of Running a Family Business

  • Family members understand each other better

The biggest advantage of running a family business is the fact that family members go along well with each other. You can just consider how Guido and his brothers Paolo and Luca improved their father’s Barilla Group. They did not only make profits but also expanded internationally.

  • The organizational structure is simple and effective

It is much easier to start a family business and manage it too. The reason is because the business hierarchy is very simple. Many of them even started with an owner, manager and staff like Mornflake Oats. One of the reason crime organizations have thrived over the century is because of the effectiveness of their management system, which is very simple, well organized and efficient.

  • Family members are committed

The family owning and running a business is also much more committed, though in reality; they are usually committed to the family than the business. The reason I say this is because such commitment usually wanes when the founder or head dies. Many of them are like Bob Rich of the Rich Products.

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Most of the individuals in a family business want to protect the family reputation. For instance, Rich worked hard to ensure that the business operates ethically. This even prevented him from expanding just to avoid government corruption or risking the safety of his employees.

  • Most family members have a solid informal training

Most of the leaders of a family business are trained by the parents or grandparents. For example, Gareth Ackerman of Pick n Pay has been in different divisions of the company before becoming the chairman, replacing his father. This is why such business is likely to have similar leadership although some may opt to add something new to the system.

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As a final note, most family businesses also consider both the older and younger market because the business is usually passed from the parents to the sons and daughters, thus the needs of both the older and younger individuals are usually considered when appropriate for business. It also suggests diversity in the products and services.

A family business might have several disadvantages but a tight-knit family can easily overshadow them with the advantages. You should definitely consider this type of business if you want solidarity, simple hierarchy, commitment, internal training, and diversity.