HomeBlogIAFBHow to build a family business and what is the prerequisite for its success

How to build a family business and what is the prerequisite for its success

Family businesses are historically the oldest form of entrepreneurship and are still an important source of economic stability and continuity in many countries. While these are mostly small and medium-sized enterprises, they are no exception to the large firms operating globally and have been family-owned for generations.

In most countries, they account for more than half of all firms, and more than half of the total output of their economies. In many countries, such as Germany, they are also the largest employer. However, successfully building and continuing to run family businesses usually requires adherence to certain principles.

The advantages of family businesses

The advantages of family businesses tend to be the common goal that binds the family together, the mutual knowledge and trust of the family members and, in most cases, the desire to keep the business in the family, i.e. to pass it on successfully to the next generation.

Their advantages often include greater customer trust, resulting from the higher visibility of the company owners (at least those whose name is in the company name) and their own work involvement. This is illustrated by the practice known in Austria, where some of the non-family-owned hotels, of which there is only a significant minority, try to pretend that they are family businesses.

The advantages of family businesses include less formality in their management and simpler internal communication. If they manage to maintain trust among family members, they do not have to set up costly control mechanisms or complex and often not very functional tools to promote motivation, loyalty or stability among managers and other staff.

Indeed, what one of the leaders of the world’s largest pharmaceutical company, Roche, otherwise a fourth-generation family owner, has said is true for well-run family businesses: that what is good for the company is good for the family that owns it. The advantage of family-owned companies is the ability to pass on, so to speak, important knowledge and experience to the next generation. And if there is a consensus within the family on the use of company profits, family firms can often devote more of their profits to investment and innovation.

In addition, countries that track worker satisfaction in different types of firms tend to conclude that medium-sized family firms also offer their employees a better working atmosphere and more opportunities for independent work compared to large firms. This is due to a lower tendency to create hierarchies and to over-specialise jobs, but also to a more cooperative management style.

How to manage a family

Building and managing a successful family business may not be easy after all. Mainly because some of the advantages of family firms can, especially as they grow, become the causes of their problems.

A prerequisite for their success is not only the trust that exists within the family, but also the framework agreement on the corporate vision or business strategy. Family members should understand – and be aligned with the vision – of what underpins the company’s core competitive advantage.

For small firms, this tends to be a more helpful and friendly relationship with customers and knowledge of the locality in which the firm operates. It may also be a certain “niche” that the firm has found in the market that matches the skills of its members. However, the success of small family firms is often based on the ability or interest of their members to participate in the various, often mutually disparate, activities of the firm.

As the family firm grows, the delineation of family members’ work roles necessarily becomes more permanent. Optimally, it should match the abilities and interests of individual family members. However, the more flexible job delineation should still be retained by the family firm: it is usually one of its enduring strengths.

If the division or clearer delineation of jobs in a company becomes a source of conflict, it usually requires that the person at the head of the company be given more authority. However, to maintain the advantages of the family firm, these should be based on its natural authority.

If the firm cannot find a job for a particular family member, at least temporarily, it should part company with him or her amicably. It is not possible to leave the family, unlike the firm, completely. Thus, the family should compensate the family member for leaving the firm in some way or only partially release him or her from the firm. He can also defend the interests of the company – or rather its sector – in other ways, for example in the town or municipal authorities, the chamber of commerce, etc.

One of the rules of successful larger family firms is that members should only finally join the firm after they have gained experience elsewhere. The family firm should not prevent them from studying, even in areas that are not directly related to its operations. It may be that sooner or later there will be some employment for their qualifications in a growing company.

However, family businesses can sometimes struggle with the problem of succession or generational change. The founders who have successfully built the company may not always be willing to leave the management at the right time. The solution tends to lie in certain rules that the firm establishes in this regard, but also in allowing older family members to continue to participate in the firm’s operation, preferably in some specialized or advisory capacity.

How to deal with employees

Sooner or later, even large families cannot escape the need to recruit staff from outside the family. However, dealing with these employees should respect certain different rules in family businesses.

Although certain positions, especially in the management of the company, may be set aside (albeit sometimes only temporarily) for family members, the company should not disadvantage its non-family employees in any way. Put another way, if these employees hold the same position in the company as a family member, their entitlements should be the same as those of a family member.

In addition, the management style of a family business should, as far as possible, allow other employees to feel like members of the team. This can be facilitated not only by a higher degree of autonomy, but also by the opportunity to have a say in circumstances important for the further development of the company. It also contributes to the good atmosphere of a family business if the main owners or managers show their interest in the company. Sometimes they are involved in some of the day-to-day activities of the company that are not related to their main role. The aim is to make other employees feel that they are not second-class in the company.

The application of this management style can help a family firm to increase the loyalty and stability of its external staff, but also to ensure that successive generations of employees’ families participate in its activities. Indeed, it is common in many successful, especially medium-sized family businesses around the world to be considered “family” by their employees.

The importance of cohesion

However, a key prerequisite for the successful operation of a family business is usually the maintenance of family cohesion as such. This is not only a prerequisite for agreement on the direction of the company and the participation of the wider family in joint decision-making, but also for the wider delegation of authority to family members in day-to-day decision-making.

Of course, family cohesion can also be supported by the ownership shares of family members and clear principles of remuneration based on the company’s performance and the personal contribution of individual family members.

However, the cornerstone of family cohesion is usually the involvement of new family members in the company. That is to say, people they have brought into the family. Their involvement in the firm should not stand in the way of the family, but they too are usually expected to identify with the firm, its principles and its strategy over time.

The long-term stability of family firms requires early preparation for succession, especially in the management of the firm. However, if there are no such individuals in the family, it is a good idea to hand over the management of the company to reliable personnel outside the family and to retain a controlling role in the supervisory or administrative bodies of the company.


We support family businesses to overcome challenges and help them build a lasting legacy in our society.

About us

© 2025 International Association of Family Businesses. All Rights Reserved.