We have all heard the numbers on the average longevity of family businesses – how hard it is to get the business to the second generation and how few make it to the third, fourth, etc. The statistics don’t lie; the odds are stacked against family companies.
The reasons are many, but one of the biggest involves the challenges inherent in working with family members. Operating a successful company is hard enough, but when you throw in the issues of finding family members who are interested in working in the business, are capable of eventually taking the reins, and can manage to get along with each other, the degree of difficulty skyrockets.
While these challenges are very hard to manage, the most successful family-owned companies are able to get the job done because they are clear-minded about their priorities in operating the business. The business comes first; what is best for the business comes ahead of what is best for the family. They take advantage of the best that family ownership has to offer, such as strong values and unique cultures. However, they also have very distinct, merit-based policies regarding family members’ roles, responsibilities, and compensation.
On the other hand, there are many family companies that have organized their business primarily to serve their family. This is one of the leading reasons why many family companies fail. I see all too many companies in which family members are in key positions for which they aren’t qualified and are being paid sums that they don’t deserve. Nepotism, not merit, is the order of the day at these companies. They tend to struggle with poor performance, poor cash flow, and the other problems that ensue. And they often eventually fail because the family leaders of these companies do not have their priorities straight. Here are some common effects:
- Expenses are high, as family member compensation and excess perks are above the norm. Profits suffer as a result.
- There is difficulty attracting quality non-family leaders because they will not work in an environment that is not based on merit. These companies can find non-family employees, just not the best ones.
- Performance suffers because people are not put in jobs according to who is most capable, but because of who they are.
These situations often exist because senior family members cannot come to grips with the truth about their family members. They feel that they are protecting them by providing for them in ways they don’t deserve. Unfortunately, they are just enabling more bad behavior and creating unreasonable expectations.
Of course, the business can only carry this burden for so long before it falls under the weight of it. This is hard medicine to take but it is necessary for survival because the alternative will eventually kill the business. If you are in one of these businesses it is time to face the facts. There can be a light at the end of the tunnel but it can also be a train coming the other way.
Mario O. Vicari is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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