All in the Family: 10 Unique Problems Family-Owned Businesses Face and How to Overcome Them

Do you run a family-owned business?

Family businesses account for 64 percent of the U.S. gross domestic product and 78 percent of new job creation.  A family-owned business creates stability, trust, and a unique perspective. Family pride and a strong work ethic can drive professionalism, service, and respect. Businesses owned by families are also more trusted by the public.  At the same time, a family-owned business also comes with a unique set of challenges. Planning for these pitfalls is essential to a growing young company.

Let’s look at 10 of these problems and how to manage them.

1. Family Conflict
In most workplaces, family drama and politics don’t affect business. Folks are more formal and less interested in others’ personal lives.  In family businesses, however, emotional displays are not uncommon. Personal rivalries for power, control, and money can find their way into the work environment. Most people find it difficult to hear critical feedback from those they love. A lack of sensitivity to the emotional well-being of employees can cause problems both at home and in the office. Divorce, separations, health issues, and financial problems can all create different political positions for family members.
If there is a strong rivalry between two members of your family, consider assigning them to different roles in the business so they will each be able to shine. Allow them separate spaces so they do not have constant contact during the day. You should also keep work talk to a minimum outside of the office. Some businesses establish a dispute resolution process as the organization is forming. There should be a clearly defined means of communication and firm boundaries. This should get written down somewhere so that people can handle their disputes smoothly and professionally.

You should strongly consider enlisting the help of an experienced family business psychologist who can work with all members of your family and help restore harmony and happiness.

2. Nepotism

There is a tendency in family businesses for leaders to hire workers that are less skilled, talented, and qualified because they are relatives.  These employees will become complacent because their lack of performance has no consequences. Non-family employees may leave your business because of a lack of growth opportunities if all the leadership positions go to relatives.
It is important to develop a detailed employment policy before creating your staff. Make it clear what your business is looking for in terms of ability and experience in different positions. You can also base each person’s salary on a comparable position in the open market. Be sure to outline each employee’s responsibilities and hold them accountable early on. If they are late with deadlines or don’t show up to work on time, have an honest conversation about the impact of their actions on the business and future of their employment. Non-relatives can offer a unique perspective to your business. They can offer input from a non-emotional position. Put them in positions that allow them to move up if they have the talent and work hard.

3. A Lack of Investment Capital
Your business may need to upgrade as the market changes. Some board members, for example, may want to hire an SEO company so the business becomes more prominent online. Older members, however, may see this as a waste of resources if there are no guarantees. It is important to have a set of checks and balances in place, so all members feel comfortable investing in the growth of the company. You may, for example, guarantee relatives that you will stop paying for SEO services if your business does not see an increase in clients within a year. 4. No Clear-Cut Compensation The informal nature of a family-run business may result in compensation problems. Employees may not be certain of what they are ultimately owed in terms of dividends, salaries, and benefits. Some may be working for the family while being unsure of how they can provide for the needs of their spouses and children. Contracts with family members do not need to be extremely formal. A lawyer or contract professional can help you draw them up for a small fee. Be sure to outline the percentages each employee will receive and what is expected of them. If your family business meets the requirements of being a small business for insurance purposes, you may qualify for a group health insurance plan and save on premiums. You can also benefit from tax deductions and credits. Talk to your tax accountant about how you can take advantage of small business benefits. Be clear from the beginning about what you will provide for each employee in terms of salary and benefits and put it in writing.


5. No Exit Strategy
Many family-operated businesses fail when one of their leaders retires, leaves, or passes away. You will want to have a plan in place for the business to transfer smoothly from one generation to the next. You should have successors identified before the older generation retires.  You will want to identify both future managers and owners of the business.  Next, identify active and non-active roles for family members when the business changes hands. If new owners and managers will require additional support, identify what resources they will need access to. Be sure to plan for the details of how these resources will get passed along ahead of time.
Be sure that your succession plan is in writing and that it gets communicated to all stakeholders. Consider transitions such as an outright purchase, a gift or bequest, or a combination of these.

6. A Lack of Clear Vision
If members of a family are all in the same business, they may end up getting controlled by the vision of the person with the strongest voice. You could also find your business getting led in several different directions at the same time. It is important to write the vision, goals, and objectives for your business down somewhere. Hash out important issues at meetings, but your ultimate plan should be agreeable to all important stakeholders. Identify a team of professional advisors, perhaps from outside your family, who can help you oversee the process.


7. No Estate Plan
If one of the founding members of your business passes away, a dispute may arise between members as to who is responsible for business assets. Before anything like this happens, be sure to create a buy/sell agreement that is fair and reflective of the value of the business. You will also want to address the taxation implications to the owner upon sale or transfer of ownership, death, or divorce. Review the estate plan to minimize taxes and avoid delays in the transfer of stock to the remaining owners or spouse.

8. A Lack of Training
Many family members may be enthusiastic and energetic about the future of your business. ]As employees, however, they can lack the skills necessary for success. Younger family members may want to take classes or take summer internships related to your business. Older folks can benefit from online workshops. When possible, allow untrained members to work alongside a skilled professional and try their hands at simple tasks. Learning by doing is engaging and effective for students of all ages.

9. Uncontrolled Withdrawals from The Business
If one person controls your business’ bank account, there may be no orderly distribution of gains. It is important to establish a system of checks and balances.  Consider giving a few trusted leaders access to the business’ bank statements so that all withdrawals and deposits are transparent to those involved. Avoid letting family members borrow company vehicles or use business services at home. Keep things professional.

10. Communication Problems

Family members may have trouble communicating in a business setting because it conflicts with their familial roles. A daughter, for example, may have trouble giving her mother directives. It helps to drop the family titles in your place of work. Avoid terms such as “mom,” or “sis” while you are doing business. Failing to do so can also make outsiders uncomfortable. You do not, however, want to keep it a secret that some team members are related. You don’t want anyone to feel like they are out of the “inner circle” because they are not a part of your family. Communicate honestly and openly with everyone.

The Power of a Family-owned business

A family-owned business can provide members with loyalty, flexibility, and built-in support. It is important, however, to plan for its challenges so that your business can grow and thrive.