All businesses face challenges, whether it is dealing with the changing economic landscape, hiring the right employees, or increased competition in the market. Family-owned businesses are not immune to these challenges as well. In fact, their challenges can be even greater in many aspects.
It is important to understand what these challenges are so that when facing with these issues, family businesses can identify them and proactively develop ways to overcome them.
Most Common Challenges Facing Family Businesses
- Family Issues
Illness, emotional, and financial problems among family members can greatly impact the day-to-day operation of the business. It is well understood that the family business is a blend of personal ties and professional objective, both are closely intertwined by tradition, family values and culture.
- Informal Culture and Structure
The informal culture and structure found in many family businesses can equate to a lack of documentation, policies, and defined strategy and goals. A laid-back approach is taken in all aspects of the business and in most cases are the main stumbling block in achieving a particular goal.
- Pressure to Hire Family Members
It can be difficult to resist the pressure that comes along with requests from family members who want to join the business. This becomes especially complicated if they lack the basic skills and experience needed for the position.
- Lack of Training
The informal culture found in many family businesses can result in a lax approach to training new employees, whether they are family members or not.
- High Turnover of Non-Family Employees
Non-family employees may feel that greater opportunities exist within the business for those who are a part of the family and may grow tired of the culture. Retaining qualified non-family employees can be a challenge. High staff turnover in key areas of the business, such as accounting/finance and sales can disrupt the day-to-day operation almost immediately. Replacement can take longer period due to bureaucracy.
- Sources of Growth
A huge challenge for family businesses can be determining where and how to get the capital and resources needed to grow the business.
- Lack of an External View
While family members may not always have the same opinions, they often have similar upbringing and life experiences which may lead to a uniform view of the business. Further, they commonly lack trust towards non-family members or unwilling to expose their trade activities to non-family members to avoid unnecessary competition, to an extent that the excessive secrecy can be detrimental to their business growth. In such instances, it is not a surprise that most family businesses experience stagnant revenue and profitability for a very long period (some over 15 years) due to this excessive secrecy approach.
More often than not, managing the family business is a lonely affair to the founder or successor mainly due to lack of support system in place. Expectation and pressure to excel are high, including the expectation to attend and resolve all issues pertaining to the business. This can be aggravated by the excessive secrecy as noted above.
Family businesses need to have external expert views of their company and their competition to thrive. Outside expert opinions can allow family businesses to put in place the best business practices available in the market to grow. Further, exposing themselves to alternative approach can bring more good than bad.
- Misunderstanding the Value of the Business and How It Is To Be Divided
Owners of family businesses may have varying opinions on the value of their business, or even worse, they may have no knowledge about the value of the business and what things contribute to or detract from that value. Further complicating this matter is determining how to split the profits of the business or owners’ stakes.
- Who Will Take Over the Business?
It is important for family businesses to plan ahead for business succession. Many family-owned businesses do not have a plan in place, and this can be a source of heated debate and intense family politics when the time arises to select a new leadership. The unexpected demise/disability of the head of the family business can complicate matters when there is no succession planning in place. Losing long established suppliers and/or customers as a result of the unfortunate incident are common when handover or succession is made at the last minute without enough support from key suppliers and/or customers of the new leadership. This amplifies the importance of personal ties and trust in the affairs of family businesses in dealing with outside parties.
- No Exit Plan
Family businesses often lack a defined strategy for what will happen if an owner wants to retire, sell the business, or transfer responsibility. This goes hand in hand with succession plan issues. All businesses need a plan for the future.
It is a common believe that when a business is passed to the next chosen successor, typically from father to son, the business would be able to perform at least at par or better. However, this is always not the case. The chosen successor may not possess the skills and experiences to bear the new responsibilities or may not have the interest in the business at all, in turn, the business may enter into a period of difficulty and if not rectified, can cause liquidity or going concern issues.
Rivalry among family members also a common situation when lacking an equitable succession planning. In a large family, it is quite possible that more than one family member may wish to be chosen as the rightful successor of the family business. When an inequitable succession decision is made which favors one family member over another, dispute and rivalry can be intense. This often result in the incorporation of a new business entity by the unfavorable family member that mirrors the original business entity. As a result, wealth can no longer be retained with the family but broken down into many parts, therefore market share and economic of scale can no longer be enjoyed by the family at large. In this case, the concept of harmony within the family should be promoted, regardless how massive the business challenges are.
In the event of possible sale of the business to a third party, the absence of legal documentation such as contractual agreement with main suppliers and customers may suppress the valuation, therefore the family business owners may not be able to negotiate a better deal for the interest of the family.
In short, how successful family business owners manage the 10 challenges described above are rarely determined by their business know-how. Rather, the key ingredient in resolving the challenges lies with the readiness to have an open and honest communications. Ironically, they are those who build their business from virtually nothing, however, in reality this issue is tough terrain to most family business owners.
At Megat Faizal Musa & Co, we provide advisory to family businesses and professional services such as extensive accounting and bookkeeping services, internal auditing, advisory work on restructuring & recovery, turnaround of underperforming companies, members’ voluntary liquidation, lean manufacturing advisory and budgetary control work. Please click here to browse our list of services.
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