5 Unique Challenges in Family-Owned Businesses

[Imrul Hasan Tusher]

5 Unique Challenges in Family-Owned Businesses

What Family Business Leaders Do Know?

Family Business has certain inherent tendencies and challenges. Family Business leaders learn about them from their experience. They understand their potential dangers and have developed the wonderful ability to navigate through them over time.

The prudent leaders watch out for them vigilantly and never allow them to escalate beyond a tolerable point.

A Tricky Tightrope Walk

Family businesses are often built on strong values and a foundation of close-knit relationships, which can be their greatest strength.

But, as anyone who’s been part of a family business knows, these same qualities can also bring about some intense emotions and distractions, so serious that they can derail your business.

Trying to balance the love and loyalty you have for your family with the tough decisions required to run a successful business is a tricky tightrope walk.

Here are the five most common challenges that can quickly get out of hand:

1. Roles, Overlaps, and Boundaries

The first thing I often hear as a Family Business consultant is about the role overlap complications. It happens when family members forget that business is not family.

Assigning clear professional roles and avoiding overlap with family roles is difficult. Roles often based on family hierarchy rather than merit can cause serious inefficiencies and resentment.

For instance, a less experienced family member may be given a senior position simply because she or he is the eldest, rather than the most qualified. This can undermine the morale of more capable individuals. This kind of approach can result in poor performance and might even threaten the business’s success in the long term.

What We Should Do?

Establishing role clarity can significantly help. It is important to set clear responsibilities for everyone in the family who is part of the business. This means focusing on skills and qualifications rather than family ties.

You may want to consider establishing role clarity using the Three-Circle Model popularized by Professor John Davis.

Listen to Professor John Davis, of Harvard describing how the Three Circles model can be used to build role clarity and unity in the family business.

2. Conflicts and Resolution

Conflicts are inevitable. Conflicts often arise when family and business intentions collide, creating a complex web of relationships and loaded with expectations. However, problems happen when disagreement over a business decision spills over into personal interactions, leading to tension at the dinner table or during family gatherings.

I have seen Bangladeshi businesses where some close family members, otherwise very qualified and can contribute a lot, are deliberately excluded from the main family business activities because of serious disagreements and resentments.

What We Should Do?

By encouraging family members to express their concerns and ideas freely, misunderstandings can be addressed before they escalate. Supporting open communication creates an environment where everyone feels heard and valued, reducing the likelihood of resentment building up over time.

Regular family meetings dedicated solely to business matters can help compartmentalize professional discussions, ensuring they don’t overshadow personal relationships. These meetings serve as a structured platform for addressing business-related topics in a formal, focused manner.

3. Ignoring Succession Planning

This process involves several critical steps, starting with the preparation of successors. Grooming the next generation requires a long-term commitment to education, training, and mentorship, ensuring that potential successors possess the necessary skills and knowledge to lead effectively. This preparation includes exposing them to various aspects of the business, from daily operations to strategic planning, to build a comprehensive understanding of the company.

In some cases, it may become apparent that no suitable family member is available or willing to take on the leadership role. When this happens, considering non-family executives can be a practical solution.

Unfortunately, I have never come across yet a single Bangladeshi family who takes this issue seriously. None have a formal plan in place.

What We Should Do?

The entire process of Succession Planning needs to be planned in advance. Aligning family interests is a crucial aspect of succession planning. It’s essential to ensure that all family members are on the same page regarding the future direction of the business and the roles they will play.

Open and ongoing dialogue is vital to navigating these discussions, helping to manage expectations and mitigate potential conflicts.

4. Mixing Personal & Business Finance

This is, arguably, the most common issue in Bangladeshi family businesses. Several family entrepreneurs shared with me their concerns about this.

Family members often have different perspectives and priorities, leading to conflicts over financial decisions. They develop an “entitlement mentality”. They differ in how money should be spent or invested.

Mixing both personal and business finances can lead to tax complications and increase the risk of legal issues.

Investors, creditors, and other stakeholders expect clear and transparent financial practices. If a business is perceived to be poorly managed due to mixed finances, it can lose credibility and trust, making it harder to secure funding or build valuable partnerships.

What We Should Do?

The solution to these lies in implementing clear policies that separate personal and business finances. Establishing distinct bank accounts for personal and business use is a fundamental step.

Furthermore, adopting formal governance structures, such as a board of directors that includes non-family members, can provide an additional layer of oversight and objectivity.

With transparent financial practices, families can protect the integrity of their business and preserve the trust and harmony within their relationships.

5. Generational Resistance

Older generations often have a deep-rooted connection to the traditional practices that have historically defined the business. They often have a strong emotional attachment to the established ways of running the business. There is a fear that departing from these traditions could undermine the business’s foundation and dilute the values that have sustained it.

In contrast, younger family members are usually more attuned to the rapidly changing business landscape. They see opportunities in adopting new technologies, expanding into new markets, and innovating products and services.

What We Should Do?

Invest in ongoing education and training for all family members. This can help bridge the knowledge gap between generations, making older members more comfortable with new technologies and younger members more aware of the business’s history and core values.

Have a structured process for change. Implement formal processes for evaluating and implementing new ideas. This could include creating innovation committees or advisory boards that include members from both generations. These structures can help ensure that new initiatives are thoroughly vetted and aligned with the business’s core values and goals.

Source: https://dhakatraining.com/5-unique-challenges-in-family-owned-businesses/