The Four Biggest Challenges for Family-Owned Businesses

Family-owned businesses come in all shapes and sizes and cover a spectrum of industries. They share all the same concerns as non-family businesses: profitability, responses to competition, adoption and adaptation to new technologies, relationships between management and employees, and generation of returns to stakeholders, to give a few examples.

But family-owned businesses have their own challenges that are unique. Let’s take a look at some of those challenges that seem to haunt all family businesses at some point in their life cycles:

1.  Emotions Unique Within Families

It’s an unusual family-owned business where relationships are formed and thrive without emotional components like trust, love, and affection. But negative emotions like resentment, jealousy, and rivalry can create serious problems within the family business.

Often the good and the bad emotions are the result of years of experience predating any involvement in the family business. They can emerge as critical factors in unpredictable ways.

• Effective leaders of successful family businesses identify these emotional components and take them into account when making business decisions.

2.  Entitlement

When family business ownership is passed by inheritance, there may be heirs actively involved in leading the business, heirs who are employed in non-leadership positions, and other heirs who are passive owners. A common problem among the various categories of owners is that family members feel entitled to a return on their equity in the form of dividends.

They may also expect to be provided jobs, regardless of their qualifications, and they might even expect to be paid a salary without actually providing useful service. Managing family members in a business is tricky, particularly if the leaders of the business wish to use the profits of the business to speed its growth rather than rewarding shareholders.

• The effective leader works to diminish the culture of entitlement in favor of operating the family business as an arms’-length business.

3.   Employment

Managing employees and maintaining good human resources practices are challenges in any business. Employer liability under state and federal laws can arise in many ways, from wage and hour issues to claims of discrimination, harassment, unfair labor practices, OSHA safety issues, ERISA requirements for pension plans, workers’ compensation claims, and unemployment compensation.

These issues don’t go away when a business is owned and managed by family members. But family businesses often operate as if the family relationships exempt them from the rules applicable to other businesses.

• When good family relationships go bad, the laws applicable to employers and in favor of employees can be powerful weapons in the wrong hands.

4.  Succession

Management and ownership succession in the family business carries with it the continuous challenge of answering the question, “Should management and ownership continue in the family?” In a non-family business, the most likely question will be “How can the business continue to provide benefits to its stakeholders, including investment returns to its equity holders?”

It’s an exceptional family business that survives and thrives through more than two generations, and investment returns to family members are usually only one priority for the business. Factors like preserving the family name or culture, living up to the expectations of earlier generations, and providing business opportunities for future generations often take priority over investment returns.

• Succession, in whatever form, is inevitable, and it is a wise business leader who addresses family succession issues before they ripen into a crisis.

Maintain Family Business Networks to Help Overcome Challenges

How can family business leaders identify and address these challenges? One of the most effective ways is to build and maintain contacts with other family business leaders and professional advisers.

Rare is the family business challenge that has not been experienced and overcome by other similar family businesses. Family business networks can provide useful opportunities to prepare for and meet those challenges.