The family business – it seems like the ideal model for running a business. It can be, but at the same time, if not set up correctly, it can become the grave not only of the business itself, but also of functioning family relationships. And if the business plan doesn’t work out and the company goes bankrupt, it means that not just someone but everyone in the family has lost a source of income. Find out what all to consider if you are planning to set up a family business in the following article.
The pros and cons of a family business
There are many pros to family business – there is a greater togetherness of family members, informal ties play a big role, and all of this creates a strong company culture. The company is often perceived as a family value worth developing, so family businesses can rely on the strong entrepreneurial commitment of their founders.
Family firms tend to be built with the prospect of long-term existence beyond several generations. The goal of family businesses is not to get rich as quickly as possible, but rather to build something that will outlast and provide a livelihood not only for the current generation but also for those that follow. That is why family businesses are much more likely than others to invest profits back into the development of their business.
The dangers of excessive family cohesion in a company
But family business has many pitfalls in addition to its advantages. Both for the functioning of the business itself and for the functioning of the family, which in the case of family businesses are so intertwined that it is difficult to separate them. In the area of business management, it is necessary to ensure that family cohesion, which is the driving force of the company, does not degenerate into nepotism (protection of family members in the company).
This is a situation in which the owners or managers of a family business promote a person to a certain, even important, position in the company who not only has no relation to the industry, but also does not have the necessary skills and knowledge. Often, the only qualification for the position is that he or she belongs to the family.
This can cause a lot of bad blood in a company. The other employees will bear the brunt of the fact that the incompetent, yet protected family member is not up to the job and they have to do it for him, even though he is the one getting paid for the job. It can also be demotivating for some workers to find that their dream job, for which they have performed to the extreme, is suddenly occupied by the son of a director who has no idea about working in this field and makes up for his lack of experience with arrogance.
The dissatisfaction of the employees is not only reflected in their work performance, for which they then lack any motivation, but also in the overall atmosphere in the company, where the previously functioning working relationships gradually unravel. This can ultimately threaten the very existence of the company.
The thin line between private and business
The family business also poses many dangers for the functioning of the family itself. It can literally destroy the family, because if the family as a whole is involved in the business, if it fails or if there is a period when things do not go well, the whole family will be affected. Suddenly everyone – not just some – loses a source of income. And if the business goes completely under, everyone bears the brunt of the liabilities from the failed business.
But it’s not just the risk of family bankruptcy. A family business can become the family’s undoing in other ways as well. According to experts, if things don’t go as they should, the family business threatens not only the family’s economic situation, but essentially its very existence. In fact, it is difficult to separate work and family life in a family business. Differing opinions on various strategic decisions determining the future direction of the company or, for example, disputes over the competences of individual family members within the family business, thus more easily escalate into the personal level.
In addition, business takes up a lot of the family members’ time, which is not good for their relationships. In addition to the mixing of business and private matters, workaholism often threatens the relationship between partners in a joint business, where the work and worries of running a family business take up virtually all the time of those involved and push partnership and family life completely into the background. To avoid these problems in a family business, the focus should be on finding ways to reconcile work and family life.
High risk of the family business going out of business
A typical feature of a family business is the passing of the business to the next generation. However, the process of intergenerational handover is also one of the most critical moments in the life of family businesses. According to data from The Family Business Institute, only 30 per cent of family businesses survive their founders’ generation. And only 12 per cent of them survive successfully into a third generation. Only 4 percent of family businesses survive past four generations.
A typical problem that complicates the development of a family business, and ultimately the possibility of its successful handover to the next generation, is the paternalism of the “founding father” (or “founding mother”).
In such a case, the oldest founder rules the company as an autocratic leader, holds all executive powers in his hands, constantly controls the activities of other family members, and only very slowly relinquishes his position in the company to the incoming younger generation.
Because he is unable to delegate authority, he does not give his potential successor generation the opportunity to prepare themselves gradually for the future assumption of responsibility for the whole company. The problem of handing over the family business also arises when the descendants of the owners have completely different ideas about their future, in which there is no place for the management of the family jewel (in their understanding, however, more of a family burden). There can also be a situation where the transfer of family assets to the successors goes smoothly, but then family conflicts enter the picture and the whole business soon falls apart.
Family businesses are the engine of the world economy
Despite the problems associated with it, the family business model is proving to be very workable and viable. Family firms, i.e. firms strategically controlled, owned or managed by members of the same family, represent a significant economic force in developed market economies. Today, 80 per cent of all global business is in the hands of family businesses.
Family businesses (in the sense that they are run by members of a particular family) include such giants as the Ford car company, the Wall-Mart chain of stores and the Anheuser-Busch brewing group. Most family firms are in the United States, where they account for half of the gross domestic product. In Europe, according to the European Grouping of Family Businesses, family firms account for about two-thirds of employment.