The most common problem for family businesses is the hiring of relatives who do not have any talent. Just because they’re a family member it doesn’t mean they have the right skills for the business. They should be hired on merit and not whether they are your flesh and blood. You should consider a family member as you would a normal employee on their talents, education, experience etc. and not on their family status you should not assume because of their age brings wisdom. This is what many families do; they just transfer the head of the family to the head of the business even if they have no knowledge or experience. This is where many families go wrong they take on family members who do not know anything about the business and are given jobs they cannot fulfill. “Mismatching the skills is not fair on both the person and the business.” ().
Family businesses find this so hard because they have the emotional aspect of it to consider and how it will affect family life. Part of this is also damaging to non-family employees because the idea of a person working for the company who has no talent to input to the company can demoralise the staff. It can be hard to not take on a family member but is harder to fire them. (Dailey.G 1994,p31) states that “Firing a relative puts strains on the entire family. Not firing a relative that deserves to be fired just because they are family creates just as much strain but not only on the family but the business and employees as well.”
This is why many family businesses fail because rather than hiring in advisors from outside the business to do finance and marketing etc. they keep it in the family. Bringing in an outsider is not always easy for family businesses because it is a “Family” business. But they can give the business a strong advantage because they may be able to recognise problems that a person in the family could not due to the fact that many family firms have a narrow vision of where the business is going. This can be due to the fact that when some of the family members grow older their views on the business growing change they no longer want to take risk and expand. () This can often block the growth of a business. This is why it is good to have an outside advisor who can also give a different perspective without bias towards a family member.
The major disadvantage to having non-family workers is that it can cause friction within the family who does not want outsiders. This is why most family businesses have a high turnover of non-family workers, which can be due to relatives who resent outside talent and can make things difficult for non-family executives. The quarrels and ill feeling of family members always have a way of spreading to non-family members, which can cause tension and them unwilling to stay in a company with such an atmosphere. ().
When starting up a family business members of the family may contribute in investing money into the business this can provoke unwanted interference and relatives all want a piece of the family business pie. This can cause squabbles over shareholding of the business, which makes it harder for decision making within the business. Decision-making tends to be centralised which can produce quick decisions but having long standing management (head of the family) can lead to static thinking. (Bridge et al 1998, p130).
A major problem with family members investing in the business is that they are sometimes unwilling to plow the profits back into the business for expansion and growth. (). Which is why many family businesses stay quite small in size and do not expand and take risk. The dividing up of the profits can also be a difficult affair. It can sometimes create a lot of tension in both the family and the business. When the business is first started and the family members make their investment it should be decided how the profits would be divided. Will everyone get a salary? What about sleeping partners? Etc. There are many questions that must be answered to deal with salaries and benefits but many do not deal with this until it has become a problem. This can create family relationship problems because the arguments of who gets paid more and who does the most work gets dragged into family life.
Succession is one of the hardest things a family business has to deal with because effects the whole business and the family. It is a once in a lifetime decision for the leader of the business () believes that if you “make the wrong decision, you life will be hell, your family will split, and your business will suffer greatly.” This statement is a little over the top but it can have a drastic effect of the whole business and family.
Many leaders find it very hard to let go as it was their project and they have lead it through the bad and good times which is why many family firms suffer. (Bridge et al 1998, p131) believes that many leaders “resent their successor or will not face up to their limited lifespan.” (Bridge et al 1998, p131) states that only 30% of family business reach the second generation and only 13% survive through to third generation. This is mainly due to the fact that the transition of succession is rarely planned ahead by the business and family so it can seem like a very drastic change. If a leader is unwilling to pass on the leadership this can lead to family members joining together working against the leader which not only causes friction at work but also at home. (Timmons 1994, p290) uses a diagram, which shows the evolution of relationship between the owner/manager and next generation succession:
OWNER/MANAGER
SOLE OPERATOR MONARCH OVERSEER/DELEGATOR CONSULTANT
NEXT-GENERATION FAMILY MEMBER
AMBIGUOUS ROLE HELPER MANAGER LEADER/CHIEF DECISION MAKER
The diagram shows the evolution of the relationship between owner and the successor. It is supposed to be a slow and planned process, which is not true for many family firms. Both individual’s roles evolve over time and they work with one another. Rather than the leader stopping straight away it is gradual and they can consult and help the successor get used to the responsibility and what the job involves.
Having new blood leading can give a firm a new lease of life and bring about change. But succession can also cause sibling rivalry and family rivalry for the top spot. The current lead should choose his or her successor on merit and whether or not they are the best person for the job, who is capable of running and growing the business and its profits. If there is no one in the family capable or willing to run the company then outside management could solve the problem. This again is something that many family businesses do not want to do and they then pass the company on to someone who is not capable or does not really want the job but feels obligated. Many families look to the males of the family to be the dominant leader but believes that “women are taking over the family business; their initiative is the key.”
(Timmons 1994,p286) states that “A significant number of potential risks and problems associated with family ventures stem from the involvement of the family. They include problems of control, credibility, family dynamics and succession.” This statement agrees with the essay title “the biggest problem facing family firms is the family” however the family is not the only problem that family businesses face there are many other factors that family firms have to deal with. Although the “family” part of a business can cause a number of problems there are many other that family businesses and small businesses have to deal with.
Cash flow management is a big problem with small businesses they tend to over trade and are not prepared for cash inflows and outflows. Under-estimating expenses and the amount of cash needed is all part of the problem along with being highly geared. These are finance problems that a number of different businesses suffer from as well as family firms.
Another problem with small businesses is the over dependency on to their customers therefore they get late payments and this creates part of the cash flow problem. These businesses tend to have a loyal customer base but are then unwilling to search out new customer demand and market their business, which is part of the narrow vision problem.
Mismanagement due to lack of management skills and knowledge are a big problem because not everyone is a natural born business leader and many small business owner/managers have no experience in this and are unwilling to get training and help in this matter.
A business plan is thought of as the beginning plan for a business and many small businesses do not think to constantly update it with plans for what the next stage is for the business. This would be most helpful for family firms as it could be passed to the successor to track through all the stages of growth in the business and could be a guideline for them. Also many businesses are never prepared for bad situations for example finance or customers not paying debts on time etc. which is why a contingency plan is useful. It plans for the worst and is a back up plan if anything goes wrong.
These are just a few of the other problems that family businesses suffer from. There are some family businesses that do not suffer any of these problems but these are very rare. (Bridge et al 1998, p73) states that “The Chinese family business exists primarily to create and sustain family fortunes.” They are not as interested in growth but keeping everything ticking over. They are small family businesses that network with each other which have made impressive achievements in many countries. (Bridge et al 1998, p73) states that “The Chinese have developed as formula for family businesses which has turned them into strong competitors of the world stage.” This may be because Chinese families have very strong family bonds and relationships and a high need to succeed. This need to succeed is drilled into each layer of the family so the leader/successor has a lot of pressure to do well. The pressure of running a family firm can be too much for one person to deal with.
In conclusion although family can be a big part of the problem for family firms they are also its greatest strength. Every member of the family knows each other’s strengths and weaknesses. You have a support system that knows both your home and work problems to rely on with the knowledge that they are loyal to you because they are family and you trust them. There is more of a willingness to succeed so they are self-motivated and are willing to put in the extra time and work longer hours to grow the company. Capital can be raised from each family member and they can all share the benefits. Family firms tend to stick to their values and beliefs and are thought of as trust worthy. They are also able to pass it down by generation and keep it running as a family firm so it has a sentimental value. Many of the strengths can also be turned around into weaknesses, which is why the family causes the most problems; they are both its strength and its weakness.
