More common than not, the only thing stopping a family-owned business is the limitations set by themselves. Top management might be lacking vision, or be fearful of new and bold strategies for doing business. Also, friends and family members may be in positions where their skills and competences are not best suited for the work required.
We have worked extensively with family-owned businesses (small, medium, large, and huge). We have conducted workshops on strategic planning, process improvement and implementation of standardized management systems. Throughout these projects, we have witnessed the problems that practically all family companies face daily and complicate considerably the operation and fulfillment of defined objectives.
In addition to the problems faced by all types of companies, the following are the five most frequent and significant problems that only family owned businesses face:
1. Arrogance and lack of preparation of the owner-director
We all know an businessman or businesswoman like that. That person who at the right place and time, with a spirit of entrepreneurship, started their own business and, managed to grow their company out of thin air.
A remarkable achievement, no question about it. But, after that initial success they have failed to adequately updated their skills and knowledge.
The lack of professional training of most entrepreneurs and trying to run a company using only "instinct" is one of the causes most new companies in Mexico fail before their first two years. Despite this, having survived for longer does not implies that the skills and talent in the Top Management is optimal, or even OK. In many cases, the growth is due to an excess of market demand, which subsidizes organizational inefficiencies. It is very common for this type of company to disappear when faced with the appearance of other companies that compete for their clients.
Likewise, the hoarding of responsibilities and authority by the owner-director is not uncommon. For example: all purchases and payments must be personally approved by him; from the purchase of a new machining center to the purchase of office supplies. On top of this, not knowing how to properly delegate the operative tasks, make of the owner-director the bottleneck of the organization and generate excessive dependence for decision making.
2. Family and friends not prepared in key positions
As we all know, the good professionals already have jobs. Unfortunately, these are not the ones who ask the owner-director to hire them to work in their company...
It is very common for the owner-director to invite family and friends who are unemployed or who need an economic "aid" to work in management and managerial positions. Unfortunately, this has a double negative effect on the company:
a. Because the personnel responsible for strategic and operational planning and the implementation of this does not have the necessary skills, abilities or experiences, they have very poor criteria for decision making. This, in the medium and long term, prevents that the organizational objectives can be reached.
b. Favoritism is promoted to obtain a managerial or managerial position, which demotivates the rest of the personnel, especially regarding opportunities for growth, while generating envies for their salaries (generally very high). Always, the company's staff will prefer a meritocracy over nepotism or cronyism.
In the same line of thinking, we can almost always find family and friends of the owner-director who will never lose their job, regardless of the mistakes they make or of all the activities they do not carry out.
3. There is no institutionalization
It is very common that the functions, responsibilities and authorities of the personnel are not clearly identified (including those of directors and managers who are family of the owner-director). This lack of task assignment means that the vital activities for the operation are ineffective and inefficient and that the improvement projects never materialize.
4. Superposition of the company and the family
Considering personal and family expenses within the expenses of the company, as well as including family and friends with very high salaries generates accounting and financial problems for the organization. Not to mention the displeasures it can generate among those who are not benefited from this situation.
In addition to the previous problem, any problem between family members and / or friends will become a company problem. These problems usually require the intervention of the owner-director who, as we mentioned in point No.1, has a very busy schedule.
5. The heir’s eventual promotion to director
For those few companies that manage to survive for enough years to see an owner-director retire, there is always the uncertainty about the new direction that the next heir (or heirs) will determine.
It is alarming that 70% of the already established family owned businesses disappear in the transition from the first to the second generation (bankruptcy or sale to third parties). The same happens to 20% of the companies in the transition to the third generation, and to a 7 % in transition to the fourth.
Only 3% of family owned businesses successfully established during the first generation manage to continue existing after the fourth generation.
In many cases there is a generational clash when new generations begin to be involved in the decision making and how the company processes are carried out. These different ways of approaching the problems of the organization can cause interfamilial problems, like those described in point No. 4.
In the best of cases, the heir will be a person who knows the company and its processes, fair, cultivated, and with the criteria for making decisions at a strategic level. In the worst case... the story does not last long.