Family-owned businesses (FOBs) constitute the oldest and most common form of commercial activity around the world. Unlike public companies (many of which are also family dominated) where ownership, management, and control are relatively distributed between company management, the board of directors, and shareholders, the FOBs situation is reversed.
Ownership, management, and control are highly concentrated in a few individuals, sometimes only one. To complicate things further, these individuals are related.
Relationships really count
Properly channelled into a business, the strength of these relationships can make for a formidable competitive advantage. When people bring to their work the power of their primary relationships, a tremendous amount of energy results.
Relationships are based on shared values. Commitment ensures perseverance and focus on the common mission for the common well being. Non-family employees respond to the family members’ relationships and behavior and apply themselves similarly. The family’s values and commitment are translated into the culture and behavior of the business – for ill as well as for good. Customers, creditors, vendors, and other members of the community also notice.
So what else?
Given the structural differences between FOBs and other kinds of commercial systems, there are many other significant advantages and disadvantages.
FOBs tend to be innovative, flexible, customer-oriented entities that are well-focused on smaller, but well-defined market niches. They do not have rigid bureaucracies and can make decisions rapidly. Also, because the family name is often on the door, service and quality are paramount cultural values.
However, although FOBs can respond quickly, they often are caught up with short term gains rather than long term objectives. There usually is no written strategic plan for the business – or the family – and sometimes there is not even a reasonably organized, annual operating budget. Moreover, although the owner has complete decision-making authority, he or she rarely gets good intellectual support or feedback about, and especially before such decision-making. Indeed, decisions often are made in an intellectual vacuum.
This vacuum is due to factors like an absence of a competent board of directors, devoting inadequate resources to administrative, marketing, financial, and other types of managerial support, and the private, domineering nature of most family business owners which bar communication flows.
FOBs have another difference from public companies. The economic needs of the family sometimes compete with the capital needs of the business, particularly if both are growing rapidly. This situation can become exacerbated when there are a significant number of inactive shareholders or when there is a large influx of members into the family during a relatively short period of time, thereby setting the stage for unnecessary rancor within the family.
Planning to succeed
Hence, it is evident that FOBs are distinct from public companies in positive and sometimes negative ways. Regrettably, two-thirds of FOBs will not make it from the founding to the second generation, and less than 10 percent will make it to the third generation. What should you do to make your FOB succeed?
- Retain the assistance of qualified advisors to help articulate, sort out and deal with both family and business issues
- Create a strategic plan for the business that incorporates your vision and share it with the family and the next generation of managers
- Start the planning process early – five to eight years at a minimum, so all the kinks in the transition can be addressed beforehand
- Promote open communication within the family and the business in terms of what is taking place and why it is happening. Ask for input.
Family business is two words, and the needs of both the family and the business systems have to be honestly addressed for both to thrive. This takes time, courage and commitment. Family business owners who seek the necessary assistance and get started early can overcome the negatives and accentuate the positives for business success.
This article is partly excerpted and adapted from Dreux, D.R., Capitalizing on the Strengths of Family 0wned Businesses, http://www.genusresources.com/index.html.