Introduction
In a family-owned business, the business and family act as two distinct but connected institutions with distinctive boundaries and a different set of rules. Managing the responsibilities of family and family-owned businesses can be one of the most challenging tasks for business owners. Apart from the usual business challenges, a family business faces a unique set of challenges due to such nature of ownership of the business. These challenges can have significant consequences on the robustness and the life of the company.
As a family business owner, it is imperative to understand what these challenges are and how to deal with them when the time comes. This not only helps owners identify these issues swiftly but also helps to proactively and efficiently work towards deploying solutions to overcome them. Identifying priorities and determining strategies can help establish and maintain a fair balance between the family and business while reducing conflict. In this article, we take a look at some of the conflicts and challenges that plague a family business.
Challenges
Family members may not see eye-to-eye on everything, but they do have broadly similar upbringings and life experiences. They also share similar values and may have similar views on certain business topics. This lack of external view can seriously inhibit the growth of a family business. There will also come a stage where the business will grow beyond a point where the family members don’t have the skill or qualifications to deal with the complexities and the challenges.
A fresh perspective is required to counter these obvious limitations. In this case, hiring of outside talent or experts to fill key positions for the long-term benefit and sustainability of the business becomes vital. They also bring a stabilizing influence to the conversation by offering a fair and independent perspective.
The unwillingness to bring outside talent by family members is a huge challenge. When non-family employees are brought into the inner circle, it can lead to some resentment from family members. The family members can make it very difficult for them to operate efficiently and independently. Favoritism for family employees and limited opportunities for advancement can also be very difficult to deal with. Therefore, it is very difficult to hire or retain non-family employees as dealing with family conflicts, favoritism and interference can be a highly unattractive proposition.
Paying family members and distributing profits can be a challenging affair. This is one of the main causes of disputes and conflicts in family businesses. These disputes involve salaries, bonuses, commissions, and ownership shares. Determining how to split the profits of the business or ownership stakes can become highly complicated. Often, the compensation is perceived to be unjust or inequitable. For any business to grow, it must be able to use a large portion of the profits for growth activities. But some members may not empathize with the logic behind these investment decisions as it reduces the amount of profits or dividends they receive. Generally, the different stage of life of the members determines their perspective towards ploughing back.
Often the value of a member to the business and his popularity within the family, settle down at different levels, causing significantly variant views of the correct level of reward for the person’s business contributions. Hesitancy of the more respectful and emotionally accommodating members on pursuing a fairer reciprocation of their services within the family management, often results into, either of them surviving in the business as underpaid till their virtue is drained and they become acrimonious; or move out of family business and pursue their vocations alternatively. Besides damaging the fabric of filial affection this leads to conflicts in a family business making it difficult for it to grow and succeed.
Many family business owners do not have a plan in place to select new leadership when the current generation retires or dies. This is often a source of conflict as succession in a family business is inevitable and without a well thought out plan, it leads to a crisis. Unresolved family differences, communication problems and differing expectations can lead to reluctance on part of the current leadership to name a successor or firm up a succession plan. If the succession is postponed, the current leadership may also develop a preference for maintaining the status quo. This can seriously inhibit the growth of the family business as they may resist change and refuse to take any risks.
More often than not, without a plan, the decision and discussion to determine new leadership can become heated and lead to family problems. In such cases, ensuring a smooth transition and a successful transfer of power is key for the survival of the business.
Timing the passing of the baton is a very critical issue too. Older generation holding on too long can frustrate the younger generation with powerlessness during their most creative, productive, and energetic years. This can either cause an exit, breed internal politics, or foster an existence reconciled with injustice due to suppression; neither of which is conducive to business growth. Many family businesses get fragmented on succession, resulting into a loss of advantages of scale and integration of value chains, since the division happens more for the satisfaction of the warring individuals rather than for retaining maximum shareholder value. One of the most sensitive aspects of family businesses, succession requires significant professional attention and planning.
Some family members believe that it is their birthright to enter the family business, irrespective of their professional qualifications and suitability. It is therefore imperative to decide if being born into the family is enough for anyone to enter the family business. Business owners often face pressure to hire relatives or close friends who may lack the talent, skills, or experience to contribute in a meaningful manner. This can often be a very costly proposition as once these members are hired; it could be extremely difficult to fire them or costly to buy them out. Here, it becomes important to establish that entry into the family business must be based on merit and not considered to be a birthright.
At the same time, it needs to be admitted that a family business, prima facie, is a vehicle for ensuring financial wellbeing of the family and a certain degree of birthright vis-à-vis it does exist. What that right is, may need articulation and recognition within the family though.
When a family member decides to call it a day, growth and continuity is achieved only when the succeeding generations take the responsibility and continue to grow and expand the business. The important thing here is to have an agreed mechanism to regulate the exit of a family member. Also, protecting the interests of the family business and the exiting family member’s interest becomes important. A lack of defined strategy for what happens when a member wants to retire, or transfer responsibility can affect the robustness of the business. This goes hand in hand with the succession planning issues. Clear rules of entry and exit can reduce conflicts in the business and ensure sustainability.
Many family businesses while having family control also have public shareholding, private equity investments and other investors. These businesses have an even larger responsibility towards these stakeholders to manage the family and business aspects in manner that insulates the business against family considerations weighing on business. Decisions taken considering the family interest impact the fortunes of the non-family investors too. Many times, such stakeholders may not have any meaningful ability to influence or change such decisions.
A history of insensitivity to the expectations of such stakeholders can stunt the ability of the business to raise funds and mobilize financial participation of other such investor groups in the future. Strategic management of family and business considerations with adequate transparency around such decisions can inspire the needed confidence.
Although it isn’t a challenge for every family-owned business, for most owners, there is an issue regarding the professionalization of management. We will touch upon some of the key challenges below.
- Sibling Rivalry: This is one of the greatest challenges in a family business and a major contributing factor in the demise of most family businesses. It usually happens when one sibling believes that the other sibling is receiving undue favoritism. This is more emotionally motivated, and the siblings try to bring each there down directly impacting the health of the business. Siblings with different belief systems, conflicting values and different management styles can waste a lot of energy and resources trying to show each other up. This can start when the siblings are children and can extend into adulthood. In a family business, all members work as a team towards the good of the business but when siblings directly work against each other at the cost of the business, it can lead to a split in the family business or even the demise of the family business.
- Employing Spouses: When spouses are invited into the family business, personal relationship issues can spill over into business life and vice versa. There is also a lack of clarity around decision making when a husband-and-wife work together. This can affect all the stakeholders involved, blurring the thin line between personal life and business. The complex nature of the relationship along with the fear of separation creates an extremely trickly situation for the business. It can have some devastating consequences that can directly affect the survival of the business.
- Nepotism: Showing favoritism towards one’s family member without regard to merit can have damaging effects on a business. When a family business is looking to fill a void or employ new personnel, hiring relatives without regards to core competencies, qualification or skills weakens the business. This can also have a negative impact on the capable, non-family members. This is also one of the major reasons for high turnover for non-family employees as they feel they don’t have the opportunities to grow.
- Entitlement: In any family business, there will always be members who don’t appreciate the hard work and contribution of others. These members believe they have the right to benefit from the business without any concern for what they contribute. This doesn’t bring any value to the business and inhibits its growth. Entitlement can also come in other forms. The current generation of owners may believe that it is their right to lead the business till they die and fail to pass the baton to the next generation. The next generation may believe that it is their birth right to take over the family business. These decisions can directly weaken the business and significantly impact the family relationships creating unnecessary conflicts.
Conclusion
It is imperative that a family business and its members identify potential sources of conflicts and work towards ensuring that strategies and plans are in place to meet these challenges. Differences and issues need to be resolved, and all members must be taken into confidence to set the rules and manage conflicts. Ultimately, it is the responsibility of the members to carry on the legacy of their family and to ensure the long-term survivability and sustainability of the family business. In the subsequent articles, we will explore how each of these challenges pose a significant threat to the business and what are the likely best practices to deal with them.
Also Read: Part 2 – Strategic Succession Planning for Family Business
