Challenges of Family Ownership (Rudy Ortiz Expert Advice)

Rudy Ortiz

I’ve been involved with small businesses since 1985, and I’ve had a closeup view of hundreds of family-owned businesses. While family-owned businesses share the advantages and challenges of any small business, they often have more of both.

Among the common characteristics of family-owned businesses are that they are founded by one or more members of the family who actively manage the business. The family members, as a whole, have controlling interest.

A significant percentage of all small businesses are family-owned, and they create, on average, 60 to 80 percent of net new jobs each year. However, according to the Small Business Administration, only about 30 percent survive past the second generation, and only 13 percent to the third generation.

It might surprise many to know that 37 percent of Fortune 500 businesses are family-controlled and represent the fastest growing sector of the economy. This includes companies like Wal-Mart Stores Inc., Tyson Foods Inc. and many more.

The irony of family business is that the same characteristics that can lead to their successes can also contribute to their demise. These competing characteristics include family trust, founder independence and tenacity, and extensive product knowledge. It is important to review each of these in fuller detail to understand the challenges family businesses face.

If the family is a trusting one with a strong leader, the company tends to function in the same way. The children look to the company leader for many of the same things they seek at home, and non-family employees become like close relatives who share a willingness to pull together for the good of “the family.” In addition, employees enjoy working for businesses where they have more input and feel they are not just another cog in the wheel.

On the other hand, a trusting environment sometimes misleads the business owner into neglecting strategic financial management systems or even guidelines for how the company is to be managed. When this happens, problems tend to occur both within the immediate family unit as well as the “extended family.” In addition, important decisions are sometimes based on feelings rather than business rationale. Soon, the right hand doesn’t know what the left hand is doing, contributing to the label “Mom and Pop business.”

While I have had clients with unrealistic expectations, those who actually pulled it off understood the difficulties they would encounter; they were willing to do the hard work and prepare themselves to make it happen. In many cases the founder(s) wanted to start a business not only to satisfy their own personal ambitions but often wanted to build something they could hand over to their children in order to provide well for their families for years to come.

But sometimes, an independent personality avoids input — especially men who, as a gender, are inclined to try to “figure it out” themselves. This resistance can cause minor problems to escalate to the point that it causes the organization’s demise. All too many founders have also discovered their children have no interest in being part of the family business, much less running it. In addition, while hard work is vital in the early stages of the business, it can contribute to feelings of resentment if it is all-consuming.

In many cases, clients have practiced their “trade” for extensive periods of time and have a great deal of expertise. Having seen the financial rewards accrued by other business owner(s), many decide they can do the same thing for themselves. I try to set their expectations correctly, helping them understand the realities of owning and operating a business. It is very easy to start a business, but extremely difficult to keep it going.

In some cases, clients’ sense of having industry expertise makes them feel they don’t need anyone else’s input. They don’t understand other critically important facets of a business, such as marketing and management. Just because one has specific “technical” skills doesn’t mean one knows how to run a business, and the high failure rate of businesses provides proof.

The social and economic welfare of family-owned businesses play a significant role in the economic well-being of the United States — and especially Arkansas with its additional emphasis on family cohesiveness. Given the potentially negative consequences, business owners shouldn’t try to figure it out by themselves. There are plenty of resources, including the Arkansas Small Business & Technology Development Center, which exists to help a new family business from becoming a negative statistic.

Rudy Ortiz is a business consultant for the Arkansas Small Business & Technology Development Center in the College of Business at the University of Arkansas at Little Rock.