The Challenges of a Family Business

Picking up the keys of the real estate agentFamily businesses are thriving all over the world. For instance, they make up a considerable portion of the US economy, estimated between 80-90% of all business in the United States.

The PwC Family Business Survey 2012 highlights that family companies in both developed and emerging markets, and in ranging sectors across the globe, remain to be profitable, resourceful, and confident about the future.

Family businesses are both strong and unique but they are also more complex. They face the same challenges as any other business in navigating a severely unpredictable environment, but as both the business and family grow, they must also deal with a range of specific problems. Not only must family businesses manage the challenges of operating in a difficult global economic environment, they must address inevitable generational change.

Family-owned businesses’ unique qualities differentiate their strengths from large corporations. For instance, they often hold strong values thought to win business due to their closer and more personal customer relationships, an entrepreneurial mind-set giving them the ability to reinvent themselves with each new generation, and a commitment the local community in retaining employment of staff in tough times translating into greater loyalty and commitment from employees.

In hand with their unique strengths come their specific challenges. A family firm’s long-term success rests on the sturdiness of three pillars, three key tipping points: scale, skills, and succession.

The first pillar, scale, poses challenges for all types of companies. However, it may be particularly problematic for the family firm. Scale raises complex questions about the resources a business can draw on, ability to access finance, and the risks a company is prepared to take.

The tipping point, or change in company size, could manifest itself in a change in the market as a result of the actions of a competitor or the launch of a new product, or the breakthrough by one’s own firm thus needing investment to exploit. The first question to ask is therefore what exactly would be scaled – product, brand, or capability?

The most common instance of tipping point is internationalization – entering overseas markets, and/or becoming exporters. Substantial expansion, whether it is domestic or international, demands finance. Finance in itself generally confronts family firms with a problem, as they do not have the same options as the conventional larger corporations such as approaching banks, mortgage their assets or debtors, or go to capital markets. Nor can family firms leverage their balance sheets in the expectation of a quick sale, or attract venture capitalists or business investors with equity stakes like smaller start-ups. Though presently expensive and restricted, family firms tend to opt for bank debt.

In addition to financial worries, moving into overseas markets presents further practical and commercial challenges. The three most significant issues faced are understanding the local cultural and ways of doing business, competition, and dealing with local regulations.

However, there are numerous considerations that need to be taken into account when taking business overseas. It is therefore imperative for family firms to ensure complete understanding and confidence in changing their scale to achieve their full potential.

The second pillar, skills, is seen by businesses to be in shortage for the next few years.  However, skill shortages pose greater threat to family firms than other companies, as it can be a difficult challenge to recognize and address a lack of skills among family members themselves.

Furthermore, family firms are in competition with larger corporations to attract the brightest and best. Traditionally, corporate desired high-calibre individuals are drawn to large listed companies in belief that they will achieve greater financial rewards and career fulfillment and that family firms will hinder their progress due to the constraints of a shareholding structure.

Family firms also often assign titles rather than roles and responsibility based on seniority or family ties. Indeed this raises challenges of its own – it is hard to gain family consensus to hire external managers to supplement or replace family members in key positions particularly when it involves giving up an equity stake.

It is evident that such complications are not solved easily, but in order to achieve potential and exploit markets, family firms must address their skills gap. To do this, it is crucial to critically map out the skills present within the business. Large companies typically have a formalized talent management process indicating skills apparent in each individual team and department, followed by a plan ensuring the inflow of qualified individuals in the short, medium, and long term.

It is apparent that a similar tactic should be used in family firms. They should assess the skills currently held by the company, and which are needed both presently and in the future. It is also important to determine which skills could be developed internally, and then to establish how to do so, along with which skills must be recruited from outside. It is also helpful to take advantage available sources of support to further internal skills, such as training and mentoring schemes offered by the government.

In order to seize new opportunities domestically or internationally, and to achieve their ambitions for growth, family firms must note and address their skills gap.

The third pillar, succession, the passing of a company from one generation to the next is a unique quality that sets family firms apart from other corporations. Such a quality can demonstrate strength and longevity, or a structural weakness. This tipping point is often extremely complex, and a root cause of family conflict that can extend to a business breakdown.

The moment of a company’s transition from one generation to the next is difficult to time and manage. The point of transition is often coupled with conflict, surrounding issues such as disagreement over whether to sell the business, to float, or hand it down, often triggered by uncertainty of the appetite or aptitude of the next generation. Disagreement may also circulate clashing visions of the company’s future, remuneration, and the tax consequences of transferring ownership.

Each family firm will have differing circumstances when it comes to company succession, however, there is no doubt that each transition will be a sensitive moment and is thus crucial to acknowledge and plan for. It is important to evaluate viable options, generally a full handover to the next generation, the transfer of ownership but with non-family professional management, a sale, or floatation – each option raising its own concerns.

It is important to anticipate conflict and act to prevent. The moment of succession is an ideal opportunity to develop and/or update a comprehensive family character, in which everyone is involved.

It is essential to have a thorough understanding of the tax implications of selling, floating, or handing over your business as there will be a range of tax such as personal inheritance, corporate, and sales for the owner of the firm at the point of succession. Research and planning may ensure that the appropriate structure of the business is to minimize tax so the company can take advantage of available tax reliefs.

Despite these unique and complex challenges, many people attribute much of their companies’ resilience to the fact that they are family firms – the support from relatives and the benefits of being able to take the long-term view.

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