Do you want to start a family business but don’t know what to expect? If YES, here are 10 critical challenges of running a family business and how to handle them.
Family businesses have existed since time immemorial and they may come in the form of a small, medium or large scale business that cuts across almost all industries in entrepreneurship.
What is a Family Business?
A family business is a business that is owned, managed and run actively by two or more members of the same family. According to research that was carried out by the family firm institute, about 70 percent of the global Gross Domestic Product (GDP) is being contributed by family firms.
Running a family business can be quite an arduous task, but with contentious effort it can also be incredibly successful and rewarding. Separating personal life from the family business is one of the key tips that should be followed if you want your family business to succeed; yet it is common place that in a lot of family business meetings, issues tend to shift from talks about the business to family matters and affairs.
For some family business owners, they don’t just worry about turning in profit in their chosen business; they also worry about ensuring that the business survives so as to be entrusted into the hands of the next generation. In fact data collected by the family business institute found out that only one third of family businesses last into the second generation of ownership, 12 percent to the third generation and just only about 3 percent reach to the fourth generation.
Most a times, people are warned to stay away from starting a business with family members or friends. And if you would want to venture into a family business, you have to think long and hard and make sure that the pros you perceive outweigh the cons.
Why Start a Family Business?
You have most likely lived with your family members, had meals with them, spent considerable amount of time with them and this confers on you some knowledge of what makes them happy or mad. We love and cherish our family members and will try to stand up and support them in times of need.
With this level of understanding, it would seem that organizing a family business would be easy. Well, to say the truth it depends. Some families have been able to turn their business into a multi-million enterprise while some only succeeded in ending in failure, violent acquisitions, family feuds, rancor, enmity and strained or even broken relationships. Family businesses like Sun Pharmaceuticals, Walmart, Roche, Novartis, Oracle, Samsung Electronics, Nike, Gucci and a whole lot of others have been able to succeed on a global scale.
Family businesses are plagued with a lot of unique challenges which other businesses that are not family owned or operated may not even have to encounter. Here are the top 10 most critical hurdles that almost all family businesses face.
10 Critical Challenges of Running a Family Business and What to Do About It
In family owned businesses, it is common place for family members to get a position not on merit but just simply because they are members of the family. They may be children, siblings, spouse, cousins, nephews or nieces. Due to the fact that they did not get the job based on merit, there is always the tendency that they will underperform and ruin the business especially if it is a business that has family member as the only employees.
It can be quite difficult to resist the pressure that can come from close family members and relatives to inculcate them into the family business irrespective of if they have the basic qualifications. Once hired, it can be quite difficult to fire some family members even if they are costing the company a lot.
It is also common place for these family members to just enter a business and be placed at a very high rank that they do not deserve. This can breed contempt among members of staff who are not of the family.
SOLUTION: To get the best results, the head of the family business should try his best to enforce policies that favor a competitive atmosphere while favoring no employees. A strict policy that will allow the business to only employed qualified family members can help to reduce incompetency. Alternatively, you can offer special training to the unqualified family member in the case that you cannot wriggle out of employing him or her.
2. Separating business from family
Separating business from family is easier said than done in a family business. Family members will expect more flexibility to be granted to them especially if they are going through some challenges in their personal life.
Take for example, if one of the family member who is also an employee is going through a divorce, the will expect to get more flexibility at work to deal with their personal issues. Physical, emotional and financial problems among family members can greatly affect the smooth running of the business.
These excesses will be freely displayed in a family owned business yet these excesses will be put in check by the same individuals if they had been working with strangers or in big offices that they do not know so well. Also there is a tendency for family members to start discussing about family issues during work hours due to the shared familiarity and thus reducing productivity.
Conflicts are bound to arise in any business yet the conflict in a family owed business can be even more deadly. Conflict between family members can spill over to the business with family member taking sides thus reducing productivity.
Such conflicts may arise as a result of rivalry between siblings, animosity between different generations of the family or even a marital dispute between spouses. Conflicts are more common and deadlier in smaller businesses. It is quite common to see family business members compete over who gets more benefits, roles and responsibilities and of cause power.
If these aforementioned issues are not ironed out from the get go, they will always present problems later on. Resolving family conflicts can be a long and arduous path, yet if family conflict is not tended to; it could fester and choke the business to death.
4. Uncontrolled withdrawal
One of the major issues that face family business is uncontrolled withdrawal of funds from the family business account. A lot of people lack financial discipline and as such when they are in a family business situation that offers very little checks and balances, they tend to abuse it and go on a withdrawal rampage.
This situation is even made worse in a case where just one person is in charge of the check books and control of the bank account. He or she may embezzle funds while leaving others at his or her mercy. Issues that have to do with purchasing items for running the business, payment of salaries, general running of the business and repayment of loans usually suffer. This situation is made even more worrisome due to the fact that in most cases of this type in delinquency, it is not reported. This is to protect the family member from prison.
5. Unclear control of the business
Most family businesses have no clear cut control or even in cases where they exist, they are poor and weak. Most times, it is difficult to say in clear terms who holds the highest post and is in charge of running the show. For example, an employee may fill the post of a manager, yet when he needs to make a decision he will first have to consult another individual for approval. Most times, the person he is to consult may not even be as knowledgeable as him in business dynamics.
6. Lack or hazy succession plans
This area is sometimes hazy for a lot of family businesses and as such it usually presents itself as an issue down the line. The founder of the family business spends time and energy to tend to the business, yet, most times there are not clear plans as to who gets to take over the business in the case of the demise of the current head of the family business.
Sudden death or incapacitation of a key decision maker can plunge the business into crisis and battle for supremacy. Also, when selling the business, the process is fraught with confusion. Succession is usually not a big deal for non-family business as more often than not there is already a laid down process of choosing a successor in case of any unexpected eventualities.
Lack of a succession plan may lead to having a member of the family or relative who is terrible incompetent taking over the business leading to a disastrous outcome. Here are a few tips to guarantee a smooth succession:
SOLUTION: Treat succession planning like it is urgent. Just like a retirement fund, the founder of the business should start up early to discuss issues on succession. Don’t put it off to a future date as death can happen when it is least expected.
Know that succession is a process and not just an event. Don’t just think “one day my first son will take over the family business”. Make plans for it. Groom the person who you would like to succeed you so that the person will not be caught unawares. Document the succession plan in its entirety and indicate your successor.
Communicate with your family members about a succession by holding meetings to discuss the issue with them. Educate your family on how to handle conflicts, positions of responsibility and to see the family business as a sacred legacy that needs to stay alive.
7. Lack of long term strategic planning
Most family businesses have the problem of projecting for the future. Important issues that affect the business are given a short term cure instead of applying a long term focus or approach. This is even more pronounced when incompetent family members are at the helm of affairs.
For example the need to carry out SWOT analysis or develop a ten year strategic plan may be under emphasized and relegated to the background. Also, there may have been a blueprint that was created by the founder and then used by the first and second generation to successfully run the business. Due to the previous success of the blueprint, the present generation may not realize that they will have to adjust it to the realities of the present time or scrap it altogether.
8. Difficulty in retaining good external human capital
Family businesses may find it difficult to attract and retain good and capable external human capital outside the family. Non-family employees may find it difficult to cope with the family conflict in the office place which can spill over and affect them. Special treatment and preferences that is being granted to family members may not go down well with employees.
Also limited chances for advancement and the fact that the son of the boss could get out of college immediately at get the position that should have rightful gone to a non-family employee further makes the job less appetizing. In addition, problem-causing family employees can hate non-family employees that are performing well and as such will try to make things difficult for them. Indiscriminate and undeserved firing of employees may occasionally occur in the process of power tussle.
9. Generational issues
In cases where a family business is old, there may be one generation that are helping to run it. At times there may be a clash of the new school and old school that share different ideologies on how the business should be run. The older generation is usually more risk averse and would prefer to stick to the familiar while the new generation will want to be a little more adventurous and explore new ways of handling issues.
At times, the older generation feels like they are the sole repository of knowledge and as such any newer idea is discarded before it sees the light of day. Generational issues and conflict can be managed by coming up with an agreement that allows the younger generation to add a new feature on a periodic basis.
Also, the older generation will have to realize that the information and ideas that the younger generation of family member have can be really important in improving the business and attracting new customers.
10. Growth challenges
The problem of growth is another critical challenge that is being faced by family businesses. There may be problems such as lack of capital to carry out the daily activities of the business and also sourcing funds and resources to grow the business is no easy feat.
Some family members may be unwilling to invest in the family business. Others may also be unwilling to reinvest the former profits that they had made from the business because they want to enjoy now rather than make any sacrifice.
Furthermore, there may be the fear among family members of exposing the family wealth to the bank thus stopping them from borrowing. Also the informal nature of a lot of family businesses make it difficult for banks to even grant them loans at times.