The evolution of a family business

By Institute of Directors
19 Sep 2014
read time
2 min to read

In the beginning:

  • family companies usually grow out of an entrepreneurial idea, many of them husband and wife partnerships
  • the owner is the manager and financial backer
  • employees are known personally.

As the business grows the owners have to decide whether they want other people involved. Sometimes children or spouses might be brought in to grow the company. If a family business is faced with rapid expansion there can be much uncertainty about what lies ahead and many new challenges which the family may not be equipped to deal with.

Taking the next step:

  • professional expertise can help shift entrenched thinking and take the business to a new level. A formal board structure, with one or more independent directors, can provide the outside perspective and objectivity that's needed.
As the business grows the owners have to decide whether they want other people involved. Sometimes children or spouses might be brought in to grow the company

The dynamics of a family board

 When a formal board is established:

  • everyone’s role needs to be identified and defined so as to avoid the risk of family members feeling disengaged
  • the needs of individuals, within a family board, also need to be balanced
  • some family members may want to grow the company
  • some might want to stick with the status quo
  • the board can also help to overcome disputes within family groups.

Independent directors and families

A board with one or more independent directors can transform a loosely run family company into one that's operating smoothly. It can make sure the company has: a strong senior management team

  • strong HR, leadership and governance structures
  • well-defined and achievable company goals.

Relationship risks

There is also a significant risk of a family business being dominated by relationship issues. These human factors might include:

  • poor communication and bad behaviour
  • simmering tensions and resentment
  • dominating personalities
  • the founder or owner always having the final say
  • complications arising from marriages and blended families.

One foot out the door:

  • if, on the other hand, an owner is more interested in selling the business or passing it on to another family member, then setting up a board can be equally important to ensure that the business is left in good hands.

The pros and cons of family business

An estimated 50% of businesses are family owned. Many family businesses have advantages that give them the winning edge over their competitors:

  • adaptability, ingenuity and passion
  • strong relationships with employees, suppliers and customers
  • the ability to retain corporate or specialist knowledge within the company.

At the same time, a family business can have distinct disadvantages. They can suffer from:

  • being too closely involved with day-to-day matters to deal with bigger issues in a business-like way
  • insufficient accountability
  • reluctance to change in order to comply with health and safety, environmental and employment requirements
  • a lack of strategic skills needed to plan for the future, or navigate a rough patch
  • a lack of agility and flexibility to make decisions quickly
  • conflicting views about company goals or the need for change.

Thinking about succession planning?

Planning for the future of a family company is often more complicated than other companies.

Find out more

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