When Is The Right Time For External Input?

Family-owned businesses often conjure images of quaint mom-and-pop shops frequented by local customers. Every business starts somewhere, and often retail and service startups are started by family members and counts people familiar with the family among its first patrons.

Some family businesses grown into some of America’s most successful public companies. Walmart, one of America’s largest corporations, was founded by brothers Sam and James “Bud” Walton in Arkansas in 1962. The Dell family still owns about 75% of Dell Technologies, and the Knight Family controls a majority of Nike.

Koch Industries, a diverse corporation involved in chemicals, raw materials, minerals, energy, and plastics, and Cargill, which produces and distributes agricultural products and livestock, are both still privately held. Candy company Mars Inc. and Reyes Holdings, a leading food and beverage distributor, are 100% family-owned.

Starting and running a family-owned business presents a unique set of benefits and challenges. Here are some of the benefits:

Trust and Commitment

Family members typically have trust and loyalty towards each other, which can foster a strong, cohesive team. They are often more committed to a business’s long-term success than outsiders, largely because they view to company as a legacy to pass on to future generations.

Shared Values and Vision:

In best cases, family members typically share the same core values and a common vision for the business, which leads to unified decision-making and strategic planning, as well as a consistent company culture.

Flexible Management Structure

Family businesses often have more flexible and informal communication channels, allowing for quick decision-making – in contrast with public companies that may have layers of bureaucracy.

Investors Who Are Patient

Family-owned businesses don’t have the profit goal pressures of public companies. The investors are typically willing to be patient with regards to earnings, profits, and repayment. Further, families often reinvest profits back into the firm for long-term growth rather than focusing on short-term gains.

Loyal Customer Base:

Family-owned businesses can build strong, personal relationships with customers, leading to high customer loyalty. People generally like to boast when they support “mom-and-pop” local businesses.

The personal involvement of family members helps enhance the reputation and trustworthiness in the eyes of customers. However, while there are many benefits to family ownership, there are also challenges to consider.

Work-Life Balance

Maintaining a healthy work-life balance can be difficult when family and business lives are closely intertwined. Members might feel that they are always focusing on and talking about the business. It can be challenging to set boundaries between personal and professional relationships. Not having separation of work life and home life often leads to burnout and stress.

Family Conflicts:

Personal conflicts and emotions can spill over into business operations, affecting decision-making, non-family employee relations, and overall harmony. Additionally, ambiguity about roles and responsibilities can lead to misunderstandings and power struggles among family members.

Professional Management

Problems can and will arise if/when family members lack the necessary skills or experience to manage the business effectively, especially as it grows and becomes more complex. Some family members may look to external professionals for input, while at the same time, other family members may resist the opinions of outsiders or adopting new practices that could benefit the business. Resistance to innovation and change can handcuff a firm’s growth potential.

Financial Strain:

Financial dependence on family members for investments of capital has the potential to cause personal finances at risk. Further, raising capital can be more difficult for family businesses, especially if they are reluctant to dilute family ownership by bringing in outside investors. In such cases, the company should look to debt financing, such as bank loans, SBA loans, or alternative funding from non-bank lenders, instead of equity financing.

Succession Planning

Ensuring a smooth transition from one generation to the next can be a tremendous challenge and source of conflict. Choosing the next leader will significantly impact the future of the business. This can be particularly troubling if the oldest child of the founder is less talented than a younger sibling or cousin. Conflicts may arise over leadership succession and the distribution of ownership.

Another common challenge arises when the next generation of the family is either ill-suited to uninterested in taking over the business. In some cases, it can lead to the demise of the firm.

“Ensuring that the family member who takes over demonstrates business acumen and understand markets, customers, how the business operates, and how it makes money, will ensure growth, reinvention and sustainability,” says Davonne Helmer, a managing director at global talent firm ZRG.

Family-owned firms face unique challenges, including work-life balance, personal conflicts, and succession planning. Overcoming these challenges requires clear communication, strategic planning, and, in many cases, the willingness to bring in external expertise and possibly outside investors.

By leveraging their strengths and addressing their weaknesses, family-owned businesses can thrive and sustain their legacy for future generations as privately-held firms or, in cases like Walmart, Ford, and Nike, as publicly traded conglomerates.

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