Family businesses are known for their high level of focus and long-range orientation, often simply doing one thing and doing it extremely well. But the very advantages that make family-run businesses successful can prove disastrous if not properly managed.
“Family firms tend to take a long-term view of investments and relationships, stay in ownership control to do things their way, focus on persistent improvement and innovation, develop loyal stakeholder relationships, build key talent in select individuals, carry lower debt, and build greater financial stability,” Professor John Davis, who leads the family enterprise programs at the MIT Sloan School of Management, wrote in the Harvard Business Review.
This “operator’s mindset” works extremely well if your business environment evolves slowly. But it can fail fast in the face of rapid change, or if you as the leader lose sight of business goals in favor of family considerations.
Advantages of family businesses
Well-run family businesses can enjoy several legs up on the competition. For starters, they tend to have a higher degree of internal loyalty and commitment— invaluable in tough times.
“Family members may be more willing to contribute personal resources to supplement lost cash flows,” said Lee Grumbles, an assistant professor of entrepreneurship and corporate innovation at Baylor University.
Customers often feel good about giving their business to family-run companies, often owing to the company’s emphasis on reputation and customer relations. “These practices can provide family businesses with a competitive advantage and an eventual gain in market share,” Grumbles told CO—.
Then there’s that long-range focus. Family businesses were more likely to increase research and development spending during the 2007-2009 Great Recession than were non-family businesses, according to a study in the Journal of Family Business Strategy. “Once a family enterprise is committed to its line of business, it does not hesitate to invest, even when others withdraw,” said study team member Phillip Phan, a professor of strategy and entrepreneurship at Johns Hopkins Carey Business School. That long-range outlook can prevent impulsive mistakes.
“Family enterprises tend to be focused on creating generational wealth, and therefore are less likely to jump into risky opportunities with unclear payoffs,” Phan told CO—.
[Read more: 10 Family Businesses That Have Made It Big]
Family enterprises tend to be focused on creating generational wealth, and therefore are less likely to jump into risky opportunities with unclear payoffs.
Phillip Phan, professor of strategy and entrepreneurship, Johns Hopkins Carey Business School
The downside of family affairs
Keeping it all in the family, however, comes with heavy baggage that can hold a business back or even sink it.
Family affairs often supersede important business decisions, negatively impacting growth, Grumbles said. Among the egregious examples: Owners are often quick to elevate unqualified family members into leadership roles, and then are slow to fire them if they can’t handle the role. Nepotism not only fosters incompetent leadership and throttles growth but encourages other great talent to skidaddle.
“Highly productive, non-familial members of the firm may have trouble advancing within the company and resign prematurely due to frustrations,” Grumbles said.
What happens behind the scenes can be just as debilitating.
Internal battles for control among children or other relatives, including over how wealth is shared and passed on, can force efforts to grow too fast, Phan said. That can threaten liquidity, as the business leaders aim to employ more family members and create wealth opportunities for them all.
Other problems may be less obvious. Lack of a shared purpose among family members from different generations, low levels of trust and poor communication can topple your family empire.
“Family members too often avoid tough issues by avoiding meaningful conversations,” Amy Castoro, president and CEO of the family coaching and consulting firm the Williams Group, wrote with a colleague in the Harvard Business Review. “Left unaddressed, these tensions increase distrust in families and obstruct performance in their organizations.”
[Read more: How to Structure a Family Business]
Fixing family matters
Successful operation of a family business boils down to leveraging the advantages of a loyal and committed pool of employees while also putting the success of the business ahead of distracting, unproductive family concerns.
The leader of a family business needs an “owner’s mindset,” wrote Davis, the MIT professor. This involves having a plan to pivot into growth opportunities, putting more emphasis on developing non-family talent, and letting go of practices–and people—that don’t add value to the business.
Start by making sure any relatives working for you are totally on board with the company’s purpose and goals. “Ensure that family members uniformly agree with the firm’s strategic vision, mission statement, and core values,” Grumbles said.
Then make sure all employees have a clear understanding of leadership roles, the level of family involvement, and what opportunities are available to non-family members. “Incorporate a leadership style that focuses on open communication and participation rather than a commanding influence,” Grumbles said. “This will promote a team environment and lower the propensity for disagreements and resentment.”
Meanwhile, don’t be afraid to introduce serious internal competition, bringing in outside talent to keep the company gene pool healthy. “Always have professional managers in the middle tier and be prepared to promote them to the top tier,” Phan said.
Finally, don’t let decisions about growing and managing family wealth intermingle with decisions about who controls the company and how it’s run.
“Use the patience and long-term orientation of the family to support the business and the excess cash from the business to support the family, but don’t conflate the two,” Phan said.
[Read more: How to Write a Family Business Succession Plan]
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