10 Tips to Make a Family Business Better Than a Quoted Business

Four weaknesses family businesses are prone to, be aware of these and avoid the worst effects:

Conflicts of interest

The family owners have the power to pursue their own objectives and desires. These may not always coincide with the best business interests of the company.In a publicly owned company the pressure from shareholders and the organisational structure should ensure this doesn’t happen to any significant degree. Of course you may still find the company sponsoring the CEO’s favourite sport or even team!

Poor profit discipline

A family business can be inclined to focus on product quality, on having the best equipment, on building a sales empire, or some other ‘non profit’ oriented strategy.

A comparison between small companies and their publicly owned counterparts indicated that the family businesses had lower profit margins, typically half what the publicly owned companies made. Partly this will be a consequence of the different motivators. Public companies are motivated to report growing profits, family owned businesses are more conservative, for competitive and tax reasons they can be less enthusiastic to recognise profits. Nevertheless, there is food for thought on profitability.

Inflexible marketing

When opportunity presents itself, a family business can be reluctant to embrace it, if it requires investment, particularly if that means equity investment and the things that go along with that, dilution and outsiders becoming involved in the business.

The family firm can become ‘engrained’ in a particular fashion or phase and not always recognise the need to continually change and move with the times.

This does not apply to all family businesses, but where a family run business fails it is more often due to poor marketing rather than a problem with production or operations. Once market position is lost, it is slow and difficult to win back. It is highly unusual for the management team that lost the ground in the first place to be capable of winning it back.

Excessive nepotism

Nepotism is the promotion of relatives on the basis of family rather than merit. Weighing against this are the forces of the marketplace. Any company which promotes incompetent people on the basis of family relationships will soon start to suffer at the hands of the competition. The non-family managers can burdened with carrying their incompetent colleagues and of course their opportunities for advancement are restricted. Faced with this combination they are more likely to become disillusioned and leave. So this policy can lead to the firm losing some of its most valuable employees, jeopardising its long term survival.

Six advantages that family businesses have, build on these strengths

Personal sacrifice

The tradition in many family companies is to put the company first, to take dividends only if there is surplus cash and to take a pride in working for the family business. Companies with this ethos can keep going through hard times which would force any other company out of business. An extreme example of this is Weyerhaeuser which incurred an incredible 40 years of losses whilst growing into an industrial giant.In times of recession family businesses can pull together. Family members know it’s their own business they are tightening their belts for. They will give up salary, time and status in order to help the company through a rocky patch. In difficult times family businesses have fewer uncertainties.Family members reporting to one another, confiding in one another growing the business together with the same goals, that is the advantage of a family business.

Valuable reputation

A family’s reputation can sometimes have a beneficial influence on community relations, banks may be influenced by past relations with the family.Family members have ‘star quality’. Customers don’t want to talk to a nameless faceless person. Everyone feels better talking to the person that runs the show. The guy who’s name is over the shop. How convenient then if there are 3, 6 or even a dozen or more people in the organisation sharing just that name! The experience of dealing with a family member can be just as reassuring as dealing with the managing director.There are plenty of big businesses out there portraying an image that says ‘We are bigger, we are more businesslike’. The family business can take a different approach. One that says ‘We are the owners, we care about you and we’ll make sure you’re taken care of’ a lot of people will buy because they like the family approach.Family tradition, pride and responsibility can contribute to the business’ long term success. The family name can become synonymous with quality.

Employee loyalty

Family involvement and management can avoid the problem of excessive turnover in management employees. In other words the family tie is likely to keep the manager in the business. If a non family manager finds a job that suits him better he will leave. If he joins a competitor or even worse decides to set up on his own, this creates a major threat to the business. The small business often relies upon its own techniques or innovations or on providing a faster service and on personal relationships. The departing manager can often take this ‘inside’ information with dire consequences for his former employer.In contrast the combination of family pressure, loyalty and expectation of future advancement tie the family member into the business.

The larger family companies often find it helpful to have family members involved in employee relations.

United shareholders and managers

Quoted companies often have ’employee share option schemes’ because it is seen as beneficial to have employees who are also partial owners of the business. In a family business this is almost always present. This mutuality creates a focus on long term performance rather than short term profit. For instance an investment in research and development. There is greater flexibility more leeway to try something different. The flexibility might not always result in the best decisions being made.There might also be an additional advantage of greater secrecy, they are better able to keep the competition guessing.

Better teamwork

Family business members don’t have to second guess the motives of their co managers or partners. They rarely need to worry about a family member ‘jumping ship’ to work for the competition. Junior family members can speak their mind without the fear they would otherwise have of being fired. The family team can argue over strategy or operations even when one member has their history, heart and soul invested with one particular option. Relatives can do that because they know one another and trust one another. With a non family member it’s much easier to harbour a grudge or allow personal conflicts to build up.

Stability

Many family businesses shy away from projecting their family image, they believe it makes them appear less professional. Other family businesses have found it pays dividends to portray their family background. It shows they are in business for the long term. They will provide continuity for both customers and employees. They don’t need to worry about next quarters profit figures, they can focus on five years time. Running any business is hard work. Managers who’s motives and ethos are understood at home are more likely to be at ease with their work , less stressed about their work – life balance. Building a business with people you care about can be infinitely more satisfying than building a business with people who don’t share the same connection.