Unique Challenges of Family Owned and Operated Businesses

Family and Business Overlap

By Riaan Steenberg

Dec 2014

The main objective of this paper is to briefly highlight the challenges faced by family-owned and operated businesses.

There is a range of literature and articles around this topic, but as each family-owned business is indeed dependent on the family dynamics and specific characteristics of the business, there are different frameworks for analysis of each. The approach that will be used is to identify some of the unique challenges of this form of a business venture.

Family businesses are owned and operated in a family context. Usually, the format of this business would be an organisation that is owned and at a high level operated by the founder or founder pair as the patriarch and or matriarch of a business. This would be a first-generation family business, and through inheritance or direct involvement, the second generation of business would involve siblings that continue the operation of the business. Another format would be a business in which more than one member or members of the same family forms part of the management of the business the same or different locations.

The vantage point of describing challenges of operating a business in this manner must include both that of the family, employees and the business at large.

Management, Responsibility, and Accountability

Family businesses are, by nature linked to the personal interest and destiny of one or more founders in the business. This leads to a lack of separation of personal and business interest, as there is a high degree of overlap in the objectives and outcomes at each level. There are reports in the literature that these decisions are often interpreted in a much more personal level and that conflict and decision making at home and the office intermingle and impact business a lot more than would in otherwise shareholders-owned environments.

Roles Must Be Clear

Family-owned companies are often encouraged to have methods for breaking deadlock and to establish some policies and rules for governing various aspects of the business that is neutral and follows a logical process.

Succession Planning

There is a range of life events that have an impact on a business that may include retirement, illness, death, divorce, pregnancies, financial difficulties, internal disputes, and various other events. Due to the impact of the nature of these, a family business must have clear succession and estate planning to ensure the continuity of operations in the event of one or more of the family members having some level of incapacitation or separation from the business. Every family business will confront questions as to what the future of the company should look like, and this debate may take considerable time and have an impact on the daily management of the business. Owner manager businesses are often also confronted with the possibility of being sold for the owners to realise the value that has been built and locked into the business.

Issues of control and transfer of control between generations also come into play and may cause conflict between professional managers and owners. Professional managers may feel limited in their growth potential in a family setup, and this has been shown to have an impact on their behaviour and performance.

Generational change.

The succession from the founding generation to the generation following is usually smooth as the children grew up with enterprising parents and were affected daily by the business. The founder often guides children in a direction to be able to continue managing the business. The challenge of the third generation is well documented and usually comments on a situation where generational wealth but not the interest has been transferred. Due to the success of the first generation and the subsequent relative luxury of the second generation, it creates a third-generation that may not be interested in really running the business, but that has to maintain lifestyle. If a business is not sufficiently professionalised at this point, it may be extremely challenging to maintain a dynastic transfer of the going concern.

Impact of conflict

One of the primary reasons why family businesses fail is family conflicts over money, nepotism and infighting over the succession of power from one generation to the next. It is essential to moderate the role of the family roles as shareholders, board members, and managers to establish alternative structures to mediate conflict and to achieve balanced decisions.

Governance Reduces Friction

Financial management

Due to the personal nature of finances, there are often moral hazard effects in the management of finances in a business. The drawdowns of shareholders and cash needs of the owner’s portfolio of investments may lead to unsustainable financial practices.

Many family businesses have a very conservative dividend policy as the reinvestment of profits is a good way to expand without diluting ownership by issuing new stock or assuming secured debts.

As is shown above, there are unique challenges in running and managing the family-owned business. These can be mediated through the professionalization of the firm and separation of ownership and management. Many of the world’s largest corporations are family-owned and controlled, and it is a significant form of business ownership.

Bradshaw, H (2013) Unique Challenges of Family Businesses, http://www.hawleytroxell.com/2013/10/unique-challenges-of-family-businesses/ accessed 05 Dec 2014.

Caspar, C; Dias, A; Elstrodt, H (2010) The five attributes of enduring family business, Mckinsey