The Challenges of Family-Owned Businesses

My friend and associate Caren McCabe, of McCabe Training, sent me an article recently called The Family Run Business: The Good, the Bad and The Ugly of Succession Planning. Here's a snippet:

"Family run companies are in many respects the backbone of American business. They are typically the most stable of small businesses, with a much lower failure rate than other small business models. Some of the largest and most successful companies in America are family owned and operated, yet 70 percent of family run businesses don’t make it to the second generation; a full 90 percent never make it to the third generation.

These statistics are not new, but appalling just the same. So why the high failure rate? Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. No plan will correct fundamental weaknesses in a business unless its managers recognize and address those weaknesses. These weaknesses prevent many family owned businesses from realizing much of their real potential."

In the flooring industry, one of the most famous family-owned businesses is Koch Industries, valued at the present time at about $100 billion. There are four brothers involved in the business. The biggest acquisition occurred in 2005, when it acquired Georgia Pacific, the giant pulp and paper products producer, for over $20 billion. With the Georgia Pacific and earlier acquisitions, Koch Industries became the owner of such nationally known products as "Stainmaster," "Lycra,", "Quilted Northern," and "Dixie Cups." Of course other famous family businesses are Gucci and the Gallo Brothers. 

According to a 2008 Article in USA Today, there are approximately 25 million family-owned businesses in the U.S. — many of them mom-and-pop operations. There is no group tracking the closure of family businesses, but experts say they are vulnerable in the current economy. 

Over the past 20 years consulting with business I have managed to work with 15 businesses run by and filled with family members. Ranging from great grandparents to great grand children and another group of family members called the in-laws. Situations where the stockholders and owners do not actually work in the business but their spouses do. Emotions run rampant, as do long-standing feuds that occurred when partners were children. The dynamics are even more critical and interwoven. Not only do you get to make decisions with your cousins at work but you get to discuss these decisions over the family dinners. 

Usually, the clearest, best-informed and most rational understanding of what decisions should be made and what actions should be taken comes in the form of how was it done in the past. Why? Because family-owned companies can be tied up by emotional influences on decision making such as "grandpa knew best," hindsight. Fearing family retribution, many of these important issues are literally swept under the rug.
While it is interesting to note that "family" businesses in the Fortune 500 (no longer private family businesses, but still family controlled) outperform their "professionally managed" counterparts, their recognition of the power of a truly good corporate culture is what is most intriguing. 

To Work or Not Work? Both! 

Pride — or as Landes calls it, the “family stewardship" — is a big factor in many family-owned businesses. Not only have you become a business owner but you have inherited something that may go back centuries. Wegmans is still run by a fourth generation of family managers. Another grocery chain, Stew Leonards, has received worldwide acclaim for excellence in customer service and quality and is featured in two of management expert Tom Peter's books: A Passion for Excellence and Thriving on Chaos. In 1992, Stew Leonard's earned an entry into The Guinness Book of World Records for having "the greatest sales per unit area of any single food store in the United States." 

What doesn’t work in family-owned businesses? Unclear expectations and roles for employees, birth order and sibling rivalry all take a big part in the success and failure of these companies. Being the oldest (usually the one who is the most competitive paired up with the youngest who everyone thinks had it the easiest) creates a dynamic that is not so easily channeled into a productive team. Often times birth order makes it difficult for younger siblings to run companies. 

No matter how much education and "smarts," it’s just not easy to grow out of the "younger kid role." These businesses work when roles are defined by expertise rather than seniority. I have seen perfectly viable companies slowly disappear because no one was willing to take on the leader. When the leader is grandpa, it’s a different story.
As much as possible, have a succession plan, stock ownership and clearly delineated roles in place.
Hire a neutral party to help separate the family issues from the the business issues. Although this isn’t always easy, team building groups and interpersonal skill building will make it easier for family members to get themselves heard.
Focus on the strengths of the people involved and their abilities as opposed to birth order and seniority. 

Lis Calandrino is a sales trainer and marketing consultant who speaks around the country on the retail industry and online marketing. She can be reached at [email protected] or 518 495-5380.


3 thoughts on “The Challenges of Family-Owned Businesses”

  1. Despite the trauma of “sibling rivalry” and whatever else goes on, there still seems to be the commitment to the family and what the family has built. Thank you for your comment, Lisbeth

  2. I agree that family run businesses are generally more successfull, I have seen many companies thrive when privately owned and other companies, who aren’t family owned just go strait down the drain.

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