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Here Are Five Ways Family-Owned Businesses Fail

May 20, 2022 • | Law Office of Zachary D Kamykowski, PLLC
Common pitfalls which will lead a family-owned business to fail 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. These can cause lasting damage to both if not correctly managed and […]

Common pitfalls which will lead a family-owned business to fail

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. These can cause lasting damage to both if not correctly managed and lead a family-owned business to fail.

Family-owned businesses are capable of the same success as any other business. For instance, Walmart, Chick-fil-A, Comcast, Carnival, Dell, and Ford Motor Company are some of the most successful companies in the world. They are also family businesses. The key to successfully running a business with your family is not allowing interpersonal dynamics to interfere with sound decision-making.

But, navigating family dynamics may be easier said than done. An awareness of common mistakes in managing a family business is the first step. The next step is creating tools and strategies that prevent family problems from derailing the company.

Work-family balance

Family-owned businesses are a driving force behind the nation’s economy. According to the U.S. Chamber of Commerce, there are 5.5 million family businesses in the United States. They account for 57 percent of gross domestic product and employ 63 percent of the workforce.

A family business may offer the best of both worlds on the surface. You get to build a company you are passionate about and share your success with loved ones. Who would not want to combine entrepreneurial spirit with family fun?

There is no reason your business and family cannot coexist and even thrive. Historically, there has often been no boundary between family life and work life. In modern times, family businesses may have advantages over other companies. These include focusing on the future, a commitment to quality that reflects the family name, and added employee concern. However, combining family and business also raises a distinct set of management challenges, including those discussed below.

Lack of Defined Roles can cause a family-owned business to fail

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. They serve as employees, managers, shareholders, and advisors. These overlapping and potentially unclear roles can be a source of conflict. Family dynamics and inappropriate communication styles in a work environment may worsen business conflicts.

Professionalism is key to any business and arguably more so in a family business. Family members in the company should occupy roles that best suit them. The company should lay out clear expectations for them and respect the boundaries of their duties. Delineated responsibilities help create ownership of—and respect for—business roles. It is nice to know that others are ready to jump in when needed. But conflict can result when positions become too blurred.

a poor Governance Structure can cause family-owned businesses to fail

Clearly defined roles and expectations start at the top. That means having a board that is in charge of governance practices. A board can help separate the family from the business and ensure the professional handling of business decisions. According to a study reported in the Harvard Business Review, 94 percent of surveyed family firms were controlled by a supervisory or advisory board.

To that end, it may be worth considering nonfamily board members. In the referenced study, family representation on such boards averaged about one-third. In other words, nonfamily representation tends to make up most of the board. This can improve the business’s prospects of managing and attracting family and nonfamily talent. Your business may currently be a side hustle or part-time endeavor. However, once it expands, you should establish a governance baseline.

Motivating Nonfamily Workers

Not just at the governance level, nonfamily members can play a stabilizing role in your business. You will probably also need to hire outside employees, especially as the business grows.

Outsiders might be concerned about joining a family business because of nepotism. In some cases, the company holds nonfamily workers to a different standard than family workers. In that case, the former will be challenging to motivate and retain. A level playing field in terms of treatment and advancement is essential. Trust and loyalty tend to be stronger in family businesses and are crucial growth ingredients. A merit-based culture that holds everyone to the same standards can motivate everyone to achieve more, whether family or nonfamily.

Succession Planning can help a family-owned business not fail

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. Unfortunately, the odds are not in favor of multigenerational family businesses. Only about 30 percent of family-owned businesses successfully transition to the second generation. By the third generation, that number drops to 12 percent; into the fourth generation and beyond, it is only 3 percent.

Succession planning is crucial for any business. Succession planning determines who will assume leadership and ownership of the business when the current generation steps down or passes away. Being caught without a succession plan can throw the company into chaos. This is especially true if the current management team is suddenly no longer available to provide leadership. It could even lead to its demise. To avoid harm to the business, the plan should be in place years before the transition. In that way, 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. As such, 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: contact our office to schedule an appointment.

Law Office of Zachary D Kamykowski, PLLC

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Austin, TX 78738

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