Strife or Thrive? 7 Most Common Challenges in Family Businesses

In the UK, 90% of all private firms are family businesses, and that’s 4.8 million businesses*. Family businesses are the backbone of the UK economy. From small and medium-sized enterprises (SMEs) to large corporations, family-owned businesses (FOBs) operate across various sectors and spread across the entire country. They provide jobs and support local communities, which ultimately contribute to regional economies.

Family-owned businesses are stewards of social and economic capital from one generation to the next. They often face unique challenges that can affect both their operational efficiency and the personal relationships of those involved. Let’s dive in.

What is a family business?

We think Rebecca Pozzi Taubert provides a clear, straightforward definition of family businesses in her blog on the UK’s Companies House. Taubert wrote:

Whether you own a sibling start-up or a multi-generational company, if you’re planning on keeping it in the family, you are a family business.

To elaborate, a family business refers to an organisation in which decision-making is influenced by multiple generations of a family related by blood, marriage, or adoption, who are closely identified with the firm.

As mentioned earlier, family-owned businesses range from small operations to large conglomerates. They often embody the values, heritage, and culture of the founding family. Family members may be involved in various roles, from leadership to daily operations, contributing to the business’s continuity and legacy.

When we think about a family business, what often comes to mind is a hundred-year-old conglomerate being passed on from generation to generation, and that is not wrong at all. Many family businesses tend to focus on long-term sustainability rather than short-term profits. This can lead to more conservative business strategies that prioritise the company’s longevity and intergenerational transfer.

In the UK, there are several notable examples of family businesses that have made a significant impact across various sectors. For example, Dyson Ltd. – known worldwide for its innovative vacuum cleaners, air purifiers, hand dryers, and other electrical appliances – was founded by Sir James Dyson in 1991. The company has remained privately owned by the Dyson family, with James Dyson’s children working within the business.

Another example is A.G. Barr plc, best known for producing the iconic Scottish soft drink Irn-Bru. Founded by Robert Barr in 1875, the company is now the leading independent soft drinks business in the UK. Throughout its history, A.G. Barr has remained closely associated with the Barr family, with family members often holding key positions within the company.

It’s worth noting that PwC estimates that the family business sector as a whole contributed around £225bn to the UK public finances in 2021, which is over a quarter (27%) of the government’s total receipts.

What makes family businesses different from other businesses?

The differences between family businesses and other businesses largely stem from their family-centric nature.

Family-owned businesses often blend ownership and management. This can greatly align interests but complicate decisions due to family relationships. However, decision-making processes can be quicker thanks to the centralised leadership and fewer layers of management, allowing them to capitalise on opportunities than competitors.

The culture in family-run businesses is shaped by the founding family’s values, which have pros and cons. A strong culture can lead to a high level of integrity, trust, and loyalty among employees and customers alike. However, it can also potentially limit diversity in perspectives compared to businesses influenced by a broader stakeholder base.

In terms of growth, family firms may be more risk-averse to protecting their legacy, contrasting with non-family businesses that may take greater risks for growth. For example, many family businesses often prefer internal financing to avoid diluting family control, unlike other businesses that might seek external funds more freely.

Naturally, succession in family-owned companies involves both leadership transition and preserving the family legacy. They may favour hiring family members and possibly overlooking external talent, whereas other businesses focus on role suitability and professional transitions. While succession can be a challenge, family businesses that manage it well can ensure leadership continuity and preserve the business’s values and mission over generations (hence Dyson and A.G. Barr).

7 most common family business challenges

Family businesses are unique in that the personal and professional spheres are deeply intertwined, leading to a unique set of challenges not often found in other types of companies. And it is, more often than not, the aspect of “family” in family businesses that poses their biggest challenges.

1. Succession planning

For many family-owned businesses, one of the biggest – and perhaps the most contentious – hurdles is obvious: succession planning. It is a complex process to determine who will take over the business when the current leaders retire or are no longer able to manage the company.

Not only does succession planning involve choosing a successor, but it also involves preparing successors for the role, which can lead to conflicts among family members. This process requires foresight, strategic planning, and often, delicate negotiations to align the interests and expectations of all involved.

What’s more, the assumption that younger family members will naturally want to take over the family business is increasingly becoming a point of contention. The younger generations might have different career aspirations, values, or lifestyles that do not align with running the family business. They might seek autonomy, wish to pursue their passions, or simply not be interested in the industry of their family’s enterprise. This disinterest poses a significant challenge: how to ensure the continuity and growth of the business when the next generation is reluctant to step in.

To address these challenges, open communication within the family is essential to understand the aspirations, capabilities, and concerns of each member. Formal succession plans should be developed well in advance, including training, job shadowing, and mentoring, to name a few.

Additionally, considering non-family executives for leadership positions might be a viable solution when there is no suitable or willing family successor. This ensures that the business continues to thrive while maintaining the family’s involvement in strategic decisions.

2. Roles and boundaries

Defining clear professional roles and boundaries within a family business can be difficult, as family members may have both formal and informal roles or expectations based on their relationships rather than their professional qualifications or the needs of the business.

In a family business, roles are often assigned based on family hierarchy rather than merit or expertise. This can lead to inefficiencies and resentment among family members who feel their talents are underutilised or overshadowed by senior members’ decisions or even their siblings’ or cousins’.

Furthermore, while it’s common for members to wear multiple hats, acting as family members, business owners, and managers simultaneously, this blurring of roles can lead to conflicts when personal issues interfere with business decisions or when business stress affects family relationships. For instance, a parent might struggle to objectively assess the performance of their child in a managerial role, leading to potential friction and perceived favouritism.

It is ideal to establish clear professional roles and responsibilities and distinguish them from family roles to prevent overlap and confusion. It is equally important to bring in external advisors or consultants to provide an unbiased perspective on business strategies and family dynamics, helping to mediate conflicts and offer professional guidance.

3. Conflict resolution

Family businesses often suffer from conflicts that arise due to the overlapping of family and business roles. Personal relationships can complicate business decisions, and disagreements over business strategies, roles, and responsibilities can spill over into family dynamics.

For example, disagreements over the direction of the business can create rifts within the family. Different generations might have varying views on how to adapt to market changes, invest in new technologies, or pursue expansion. Younger family members might push for innovation and risk-taking, while older members prioritise tradition and stability. These strategic disagreements can escalate into personal conflicts and damage family relationships.

As well, the personal history and emotional connections between family members can influence business decisions, sometimes leading to choices that are more about preserving relationships than advancing the business’s best interests.

What starts as a disagreement about business strategy can evolve into a rift that divides the family, affecting gatherings and interactions that have nothing to do with the business itself. This spillover can create a feedback loop, where personal grievances influence business decisions, which in turn further exacerbate family conflicts.

Again, it requires open communication, which is easier said than done, especially when personal relationships make it even easier to take things so personal. That said, the willingness to seek external advice or mediation when necessary can help family businesses thrive both as economic entities and as family units.

4. Financial management

Mixing personal and business finances can pose a significant risk for family businesses. This blending can create complications, as it becomes challenging to delineate the boundaries between what belongs to the business and what is personal property. Not only does this make financial management more complex, but it also raises the potential for conflicts among family members, especially when it comes to transparency and accountability.

Decisions about reinvestment, dividends, and financial growth, which are critical for the health and expansion of the business, can become contentious. When family members have different visions for the company or different personal financial needs, it can be even more difficult to reach a consensus. As an example, some members might prioritise immediate financial gain through dividends, while others may prefer to reinvest profits back into the business for long-term growth.

These situations can be further complicated by the emotional dynamics inherent in family relationships. Financial discussions that would typically be straightforward in a non-family business context can become loaded with personal history, expectations, and emotions. This can lead to decisions that are not necessarily in the best interest of the business or decisions that are made to maintain peace in the family at the expense of the business’s financial health.

To mitigate these risks, consider establishing clear policies and procedures that separate personal and business finances. Implementing formal governance structures, such as a board of directors with non-family members, can also help navigate financial decisions more objectively.

5. Growth and innovation

Family businesses often find themselves at a crossroads when it comes to growth and innovation. The core of the issue usually lies in a deeply rooted desire to preserve tradition, which is often championed by the older generation within the family. This sense of allegiance to the past can lead to reluctance or even outright resistance to change, which, while understandable, poses significant challenges in a rapidly evolving business landscape.

The emotional attachment that family members might have to the business as it has been can cloud judgment and lead to decision-making that favours the status quo over necessary evolution. On the other hand, pushing too hard for change without adequate respect for the company’s heritage can lead to internal conflicts, a loss of identity, and alienation of loyal customers or employees who value the traditional aspects of the business.

To strike the right balance between honouring tradition and driving innovation, family businesses often need to foster open dialogues that encourage all family members – regardless of their stance on innovation – to voice their concerns and ideas. It’s about finding common ground where the respect for what has been achieved can coexist with an enthusiasm for what could be. This might involve phased transformations rather than overnight overhauls, allowing both the business and its stakeholders to adjust gradually to new ways of operating.

At the end of the day, the goal is to ensure that the business not only survives but thrives, safeguarding the family legacy for future generations. This means that family businesses must embrace change as an integral part of their tradition, viewing innovation not as a departure from their roots but as an essential strategy for preserving them in a changing world.

6. Work-life balance

Maintaining a healthy work-life balance becomes especially challenging when it comes to family businesses. In such settings, the distinctions between home and work can often become very fuzzy, making it difficult to compartmentalise and maintain clear boundaries.

This overlapping of personal and professional spaces can exert additional pressure on individuals, potentially leading to burnout. The intensity of this environment can strain not just the professional but also personal relationships outside of the business context.

When work discussions spill over into family time and personal spaces, it becomes hard to disconnect and truly relax, which is essential for mental and emotional well-being. This underscores the importance of setting clear boundaries and finding time to nurture personal relationships and self-care routines, despite the inherent challenges of blending business with family life. Remember, not every lunch needs to be a business lunch.

7. External perception

Last but not least, family businesses can sometimes struggle with stereotypes that may not accurately reflect their operational integrity or professional standards. These stereotypes can include accusations of nepotism, where family members are perceived to be given undue preference for positions or promotions over potentially more qualified non-family employees. Additionally, there can be a perception of a lack of professionalism within these businesses due to the assumption that family ties may interfere with objective decision-making processes and the implementation of best business practices.

These perceptions can significantly impact the dynamics within the workplace, straining relationships between family and non-family employees. Non-family employees might feel demotivated or overlooked as they believe their opportunities for advancement are limited by their outsider status. This feeling of inequity can lead to a decrease in workplace morale and productivity.

External relationships with customers, suppliers, and partners can also be affected. Stakeholders may be cautious in their dealings with family businesses, fearing that the decision-making process might be unduly influenced by family considerations rather than business acumen or merit. This scepticism can hinder the establishment of trust and the development of strong business partnerships.

These challenges are not just external but can also influence internal perceptions and dynamics, potentially impacting the overall growth and sustainability of the family business. Thus, it is crucial for family businesses to actively work on professionalising their operations, ensuring transparent and merit-based processes, and communicating their values and successes effectively to both internal and external audiences to counteract these stereotypes.

Now it’s your turn: Leading change in family businesses

If there’s one takeaway from this, it’s how intricate the dynamics of family businesses can be, particularly when business success and family relationships can be both at stake. Consider the following:

• Open communication – Establish clear, open channels of communication to ensure every family member and employee feels heard and valued. This fosters trust which is a critical component in the successful navigation of change.
• Unified vision – Develop a shared vision for the future of your business that respects the legacy while steering towards innovation and growth. This shared vision becomes the north star that guides decision-making and strategy.
• Celebrate milestones – Acknowledge and celebrate every step forward, reinforcing the shared commitment to the business’s growth and the well-being of your people.
• Invest in leadership development – Equip family business leaders with the tools and knowledge to manage change effectively. This includes understanding the emotional and psychological aspects of change as well as effective change management strategies.
• Embrace external perspectives – Sometimes, bringing in an external consultant or advisor can provide new insights, challenge the status quo, and facilitate professional development within the family business leadership.

And we speak from experience, as a family business ourselves and a helping hand for many of our clients facing similar challenges unique to family-owned companies to come out the other side with success. As an example, during 2020 – 2022, we collaborated with a new Operations Board on the creation of an effective strategy to bring Allied Vehicles Group‘s purpose and core values to life, improve their work culture, and address a high staff turnover. Read the full case study here.

Are you a family business leader seeking to navigate change while preserving the essence of what makes you unique?

Reach out today to explore how ChangingPoint can help you achieve true alignment towards future success of your family business.