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The challenges faced by family businesses Published: Sunday, September 16, 2012 12:01 am By: Ramón L. Rivera, President & CEO

Family businesses are a traditional way of conducting business within the private sector. However, only recently family businesses have increasingly been attracting more attention public and policy discussions. The drivers for this enhanced attention are a greater awareness of the contributions family businesses make to economic and social/societal development, increased attention to the issue of business transfer, as well as a higher degree of academic interest in the issue.

A family business is characterized by major family influence on ownership and management/strategic control. Other characteristics used to differentiate family businesses from non-family businesses are the active involvement of family members in the enterprise’s everyday activities (i.e., the formal or informal employment of family members in non-managerial positions), the enterprise’s contribution to the family’s income generation, and inter-generational considerations (i.e., the intention to ensure the enterprise’s sustainability beyond the entrepreneur’s (professional) lifetime).

Within family businesses, there is a strong interrelationship between the family and the business. The family is (formally, but also informally) at the center of the company. This results in two structures encountering each other, namely the family and the business, increasing the potential for conflict, which affects both the family and the business sphere.

Family businesses tend to focus on the firm’s long-term sustainability rather than realizing short-term profits and on realizing generational changes in ownership and management. In line with this, family businesses are on average older than non-family businesses. When a firm is transferred to the next generation, it is not only financial assets, which are passed on, but also social and cultural capital.

The latter refers, for example, to the value system, i.e., the importance of honesty, credibility, modesty, respect etc. On the one hand, this has led to particular emphasis being placed on the personal commitment and engagement of family members within the enterprise and, on the other hand, on the firm’s engagement in (local) Corporate Social Responsibility activities.

Another characteristic of family businesses is the dominance of management from within the family. In this context, paternalism and nepotism are also often prevalent in family firms, as is the existence of emotional and informal decision-making.

In our own experience working with this type of firm for over twenty (20) years we have found that the challenges family businesses face are significant. The most important ones are the following:

  • Lack of awareness by politicians of the economic and social/societal contribution of family businesses, resulting in a low level of activity to create a family business friendly environment
  • Lack of family firms’ awareness of the importance of timely planning for intergenerational business transfer, resulting in ill-prepared successions endangering the firms’ survival
  • Establishing access to finance, which does not involve the loss of control of business decisions
  • Balancing business and family issues, resulting in the need for specific organizational intervention strategies
  • Lack of family business specific management and entrepreneurship education
  • Attracting and maintaining a (skilled) workforce
  • Planning and executing succession from founders to next generation of family and non-family management

In addition to finding solutions to business activities (e.g., production, marketing, finance etc.), leaders of family businesses also have to consider the overlap between the business and the family sphere. This is important for the general running of the firm, and of particular relevance in specific situations, such as in a business transfer or if the family behind the business grows faster than the firm itself, resulting in a multitude of influencing players. This leads to more extensive and difficult decision-making processes as well as a higher potential for conflict. This can be a problem, particularly in family firms that have undergone several generational changes, as distant family members have diverging interests and are less cohesive.

This requires attention, on the one hand, when formulating business strategies and, on the other hand, when designing corporate structures. Both need to be created in a way that best takes advantage of the potential benefits inherent in close relationships and of the mutual influence of the business and the family (e.g., personal commitment, long-standing experience and business relationships across generations), while at the same time avoiding the potentially inherent drawbacks (e.g., nepotism, complex decision making due to the high number of persons involved).

Due to these complex interrelationships between the business and the family spheres and the potentially high number of stakeholders involved, family businesses require specific governance instruments. However, these are not very widespread because family businesses lack awareness of their necessity and practical information on how to design and implement them.

The characteristics of family businesses require their owners/managers to dispose of specific skills to enable them to cope with the overlap between the family and the business and to run the firm in a way that guarantees its sustainability over generations. As the issue of family businesses has only rather recently been on the agenda of a few management and entrepreneurship education providers, family business owners/managers are often confronted with the challenge of finding suitable training to prepare themselves and/or their potential successors to run the firm.

The lack of specific competence development measures, which need to be widely available and easily accessible to the target group, as well as the fact that general entrepreneurship education does not incorporate the specific characteristics of family firms in their curricula hinder present and future family business leaders from being equipped with the competences and capacities necessary to effectively run a family firm. The intent of QBS’ Family Business Institute is to contribute to fill this gap by providing expert advice and education on the matter.

Copyright 2012 QBS, Inc.

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