Common Pitfalls in Family-Owned Businesses

Your family and your business are two of your top priorities. You would not do anything to compromise either of them. But working with family members in a family-owned business presents unique challenges that can cause lasting damage to both if not properly managed.

The key to successfully running a business with your family lies in not allowing interpersonal dynamics to interfere with sound decision-making. This may be easier said than done, but an awareness of common mistakes in managing a family business is the first step. The next step is to create tools and strategies that keep family problems from derailing the business.

Work-Family Balance

Family-owned businesses are a driving force behind the nation’s economy. They account for 57 percent of gross domestic product and employ 63 percent of the workforce. On the surface, it may seem that a family business offers the best of both worlds. You get to build a business you are passionate about and share your success with loved ones There is no reason that your business and your family cannot coexist and even thrive. However, combining family and business also tends to raise a distinct set of management challenges, including those discussed below.

Lack of Defined Roles

Running a family business may require an all-hands-on-deck approach. Husbands and wives, children and parents, extended family members, and different generations may wear multiple hats, serving as employees, managers, shareholders, and advisors. These overlapping and potentially unclear roles can be a source of conflict. Existing family dynamics and communication styles that are inappropriate in a work environment may worsen business conflicts.

Professionalism is key to any business and arguably more so in a family business. Family members involved in the business should occupy roles that best suit them, understand what is expected of them, and respect the boundaries of their duties. Clearly delineated responsibilities help to create ownership of—and respect for—business roles. It is nice to know that others are ready to jump in when needed, but when roles become too blurred, conflict can result.

Governance Structure

A family business should have a board that is in charge of governance practices. A board can help separate the family from the business and ensure that business decisions are handled professionally. To that end, it may be worth considering nonfamily board members. In a recent study, family representation on such boards averaged about one-third. In other words, nonfamily representation tends to make up the majority of the board. This can improve the business’s prospects of managing and attracting both family and nonfamily talent. Your business may currently be a side hustle or part-time endeavor. Once it expands, however, a governance baseline should be established.

Motivating Nonfamily Workers

You will probably also need to hire outside employees at some point, especially as the business grows. A level playing field in terms of treatment and advancement of nonfamily and family employees is essential. Trust and loyalty tend to be stronger in family businesses and are important ingredients of growth. A merit-based culture that holds everyone to the same standards can motivate everyone, whether family or nonfamily, to achieve more.

Succession Planning

A family is a chain that stretches from generation to generation. Correctly managed, your business can become a part of your family legacy, enriching the current generation and generations to come. Unfortunately, only about 30 percent of familly-owned businesses successfully transition to the second generation. By the third generation, that number drops to 12 percent, and into the fourth generation and beyond, it is only 3 percent.

Determining who will assume leadership and ownership of the business when the current generation steps down or dies—is crucial for any business. Being caught without a succession plan can throw the business into chaos. It could even lead to its demise. Therefore, a succession plan should be in place years prior to the actual transition so that those stepping in have time to learn and prepare.

We Can Help

Do you need help navigating the risks involved in running a family business? Every part of a business affects every other part. Concerns in one area can quickly spread to another and reveal existing structural deficits. An experienced business attorney can work with you to develop policies that mitigate the risks inherent to family-owned businesses. Keep your family business running smoothly now and in the future: call Agins Law Firm, PLC, PLC at (480) 401-2660 to schedule an appointment.