Family businesses can thrive, but beware of pitfalls

It is easy to see why family businesses are part of the small business landscape no matter where you go. The trust among family members and their shared destiny can make them excellent business partners or employees, especially in the early days of a business when capital and support are scarce and it cannot afford to pay high wages.

It is also no secret that family businesses can grow phenomenally successful because family members are usually more invested in the success of a company than outsider employees, and can easily form crack teams that pull together much better than a group of outsiders thrown together by employment contracts. High levels of trust and understanding make quick decisions possible and make family teams resilient and flexible.

Perhaps less well-known are the downsides of family business: the difficulty of keeping family matters and professional business matters separate, the hierarchy of the family imposed upon the business, no matter how inappropriate, and the fact that a huge part of the family’s fortune is tied up in one venture. When the enterprise fails, a whole extended family can be reduced to penury.

Isn’t it better to spread the risk and ensure that some family members pursue employment elsewhere in case the business fails? It is a difficult question, especially for talented family members. As full-time employees, they can provide a steady income for the family when the business struggles, gain outside knowledge and form an important part of the family’s business network in the outside world.

On the other hand, it is exactly the talents of such members that make family businesses so successful. Were they to choose to join the family business it could turn a struggling little operation into a thriving giant.

The answer would obviously depend on the individuals involved and the business opportunity. The natural tendency for us at Business Partners International is to encourage the entrepreneurial choice, in other words, choosing the family business over employment. As for the risks that go with family business, we believe that it can largely be mitigated by doing things right and avoiding the special pitfalls of family business.

Firstly, it is important to understand that the risks facing family businesses must be tackled in the same way as those facing any other owner-managed businesses-by emphasising planning. If a family business-or any business for that matter- can get its planning right, half the battle is won and the risks of failure are truly minimised.

But business planning is hard work, complicated for those who are not trained in it and tedious for those who don’t like toiling at a desk. It is not surprising that so many businesses do not do it properly. It requires the business management to look forward at least three months into the future, and try to predict sales, demand cash flow and profit and come up with realistic operational plans. Good business planning also includes strategies for what to do when disaster strikes.

Furthermore, just like any other business, the survival of family-run enterprises also depends on the level of professional management and the ability of the management to keep on learning and improving.

Perhaps family businesses have the slight advantage that they can share the planning and management responsibilities among the family members, whereas lone entrepreneurs have to take care of all of it largely by themselves.

But then there are the special risks that family businesses suffer from more than other businesses. Because the relationships between the family members are based on their kinship, often nobody sees the need to formalise shareholding and employment. Usually when two or more unrelated entrepreneurs get into business together, they try to make the deal between them clear with formal agreements.

However, family members are so intimately connected that the business relationships is not clarified. Often, a wife who has worked hard in the family business under the assumption that the ownership was shared, only finds out that she has no legal ownership over the businesses when the marriage falls apart. Or family fights break out when management changes have to take place because the business grows, and family members regard their jobs in the business as a sacred right rather than as an employment position in which performance targets must be met.

The answer clearly is to formalise the business structure and the positions inside the business through proper incorporation and formal, comprehensive employment contracts.

It does not mean that a family business has to give up one of its major strengths – the ability to make quick decisions informally around the breakfast table. Family members can and will continue to interact intimately and informally, but when it comes to disputes that may arise over roles and ownership, especially in the long term, formalisation is the answer. n