Family-run companies make up a large portion of the 28 million small businesses (less than 500 employees + revenue restrictions – SBA.gov) in the United States. While many who start businesses dream of one day turning it into an empire along the lines of Walmart, Trump Organization, or S.C. Johnson & Son, most remain on a much smaller scale, yet build great organizations. However, the dynamics of a family business can either create a generational legacy or a huge ship headed straight for the iceberg.
As a consultant, you have the benefit of seeing things in organizations that its employees and leadership often miss because they are ingrained within the company. I recently read about a family-owned company which had been in business for over 50 years was closing its doors for good due to what they deemed as increased competition. While they were in a very competitive environment, this company had a great value proposition that wasn’t communicated and walking into one of their locations was like a trip back to 1995. So the question becomes, what is it that destroys a family business?
They want to be involved in all parts of the business as to not be “blindsided” or in the case with other family members, especially children, the owner’s amount of time in the business overrules any potential insight that the other might bring. That doesn’t work if your son/daughter is now your VP of Marketing and cannot run a social media campaign without your blessing. These types of management structures almost always spell disaster. The owner/president/Czar will not be in tune with their shortcomings and are open to succumbing to their blind spots. As much as they take credit for the company’s rise, they will assume much of the blame for the company’s crash.
How to Avoid – If you have faith in the knowledge and training you have given your management and staff, as well as the quality of people you hire, then trust that they will utilize that knowledge to do what’s best for the organization. Proper delegation practices are a part of being an effective leader. It builds trust in those who work for you, especially if children or other immediate family members are involved. Those who prefer to hold absolute power commonly succumb to the next pitfall…
Lack of Evolution
When the competition has moved to digital marketing and has a department solely devoted to analytics and customer engagement yet your company doesn’t need that because you have the same customers who have bought from you for almost 20 years, see Totalitarian Leadership. All businesses must evolve. Let me repeat that, ALL businesses MUST evolve. Customer wants are changing at a rapid pace as the amount of information they are supplied with is continuously growing. While you may have been in the waste disposal business for 30+ years and your expertise is well documented, a more technologically-advanced company using state-of-the-art systems may be able to provide faster service to your customers at a cheaper cost.
How to Avoid – Listening to customers’ needs and observing buying patterns is always the first step. Next, company leaders and business owners must be in a constant state of learning. Whether it’s learning about today’s consumer, industry trends, or deeper understanding of your profession, the only way to stay competitive is to know everything (if not more) that your competitors know. Lastly, talent acquisition is important. Although you may be able to acquire the knowledge necessary to deal with business changes, it may be more effective to bring in a specialist who can get you up and running faster.
Poor Financial Management
While it sounds great for a founder to boast “My family and I but this company into a $5 million business”, a deeper look at their financial statements may reveal that much of the company’s assets are tied up in equipment, buildings, or unsold inventory. Should a situation arise where they need to meet certain obligations in the short run, low cash reserves could cause a significant problem for the “$5 million” company.
How to Avoid – As blood runs through the human body, cash should be as prevalent in an organization. Cash ensures that organizations can meet short-term obligations in addition to giving the company flexibility in pursuing potential growth opportunities. A properly managed financial department (or financial process for very small, non-departmental organizations) is essential and it is the job of the CEO/Founder/Honcho to ensure that his/her company has the cash necessary to fund operations. At minimum, an organization should have 6-12 months of cash reserves to fund operations.
Having grown up working in a family-owned business, it can be one of the most rewarding and fulfilling experiences. Some of the best business knowledge I received happened in my early teen years from my father. However, there are many instances where family hierarchy and politics can infuse themselves in the business and cause detriment on both fronts. For as much as I love and respect my father, I realized in my early adult years that I could never again work for my father.