All In The Family - Dynamics Of Family Business
The popularity and critical success of HBO's Succession have highlighted the potential drama and conflict within family-owned companies. However, it's worth noting that such scenarios are different for the 28.8 million* family-owned businesses across America. Instead, we should recognize the positive values and contributions of family-owned companies that are a part of our daily lives. These include the local diner with three generations of family members working together and the globally recognized larger companies managed by multi-generational families.*score.org, June 2023
Family Business: Small vs. Large
First, there is a distinction between family-run small businesses vs. family businesses. Many large companies are private and run by a family interest. Walmart, for instance, is controlled and managed by multi-generation members of the Walton family in Arkansas. For our purposes here, we’ll cover the multifaceted aspects of the family-run small business, or ‘family business.’ We’ll include various available types, structures, benefits, challenges, and observations.
Family Business: Generations
In a previous Slater Success blog about Mergers and Acquisitions, I shared a common saying familiar to those in family-run businesses:
First Generation Builds It,
Second Generation Expands It,
Third Generation Tanks It.
a. Meaning, that the Third Generation sells it for descendants to maintain a wealth component in the family of what was built from the generations before.
A family business usually evolves significantly over multiple generations, amplified by the Build It/Expand It/Tank It principle. Managing a business founded and run by a 38-year-old entrepreneur with children requires a different approach to family business management compared to a third-generation business with multiple family shareholders who may not be involved in the business.
Further, powerful demographic shifts are taking place today, with most customers and employees belonging to younger generations, such as millennials and Gen Z, whose values differ from those of baby boomers. For instance, the 38-year-old entrepreneur mentioned might use a family meeting to discuss parents' expectations of their children. In contrast, a third-generation business family would probably instead focus on how the second generation can pass on values and business history to the fourth generation who are coming up and thinking of their college years.
Last May 2023, Fortune Magazine reported that “family-based businesses understand the importance of giving back. In addition to their philanthropy, they often play a critical leadership role in community projects and civic associations.
Family Business: Types of Structures
Most family businesses adopt one of the five structures:
1. Owner-Operator model
Control of the company rests with a single person or couple. Succession planning ensures proprietorship is handed over successfully and fairly when one owner-operator retires.
2. Partnership
Two or more people make decisions and divide the profits.
3. Distribution model
Passes ownership of the company down to descendants, whether or not they work in the business.
4. Nested model
Family members own some business assets separately and some jointly.
5. Public model
Part of the business is publicly traded, or the family runs the business like a public company.
Family Business: Benefits and Disadvantages
There are many advantages to running a family business:
-Advantages-
Stability
Business managers are often family members who stay in their positions for many years, providing investors, suppliers, and consumers with confidence that sudden and disruptive changes won't occur with the arrival of a new director.
Commitment
Profits from a family business are often used to support family members, creating a strong commitment to success.
Flexibility
Family businesses benefit from the flexibility of their operations due to the multi-role nature of their staff, empowering them to respond quickly to customer issues and demands, even at short notice. Also, family businesses can more readily change their overall strategy in response to market forces such as economic upswings and downturns.
Customer & Community Focus
Family businesses have a strong incentive to invest in local suppliers and support community interests and tend to be able to provide a more personalized service to their customers than non-family larger corporations.
Long-Term Outlook
Non-family businesses typically plan their goals for an upcoming quarter, whereas family businesses tend to have a longer-term outlook, planning for years or decades ahead. This approach cultivates a culture of clear strategy and decision-making throughout the organization.
Of course, family businesses have their downsides too:
-Disadvantages-
Family Conflict
"You can't choose your family" is especially apt for family businesses. Close emotional bonds between members can make conflict resolution challenging.
Lack of Structure
Family businesses tend to rely on trust more than non-family firms but trust alone may not be enough. It is essential to take both internal rules and external corporate law seriously.
Nepotism
It's common for family businesses to promote family members to senior management positions. However, those family members may need more skills and expertise to handle their roles, which can negatively impact the company's success and make it difficult to retain talented employees.
Succession Planning
It is common for family business owners to neglect creating a succession plan. They often feel that it is not necessary until a later time, or they may refuse to accept that someone else will eventually need to take over. However, for a family business to continue, at least one family member must be willing to manage it after the founder/owner retires.
Family businesses encounter a unique set of challenges, ranging from strategic growth to succession planning to communication between colleagues (and relatives!). It's important to create a long-term vision that gives your family business a sense of purpose. You should think about what kind of family structure you want to build and assess whether it would be sustainable for three generations. and finally, If there are conflicts within your family, it may be necessary to seek the help of professional mediators and coaches to resolve them.
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