The Opportunity
Family-owned businesses are the most prevalent form of business organization in the world. Estimates show over 80 percent of businesses are either family owned, or family controlled. This accounts for as much as 70% of our GDP. It is no surprise that owners of family businesses are a large customer segment and a target for financial advisors. They control a vast amount of wealth. However, gaining their business can be a long, frustrating process, and challenging.
Understanding The Family Business
Every family business is unique, and very different than a non-family business. The business is a collection of various family members who may have differing objectives and goals. As the business ages and transitions into successive generations of family leadership, conflict can appear between family members. The problems of the family can interfere with the business. Their problems are different than non-family firms. Remember your last holiday dinner with many extended family members. Now, imagine if your employment, as well as your wealth were interrelated with each one of them! Consider another example, if the CEO of a Fortune 500 firm was getting a divorce, the impact on the corporation would be negligible. However, the impact of divorce on the family-owned business would be devastating. The spouses both work at the business as do their children. Family members would form alliances, the result would be severe dysfunction and a lack of productivity.
How Family Owned Businesses Make Decisions
Decision making at a family business differs upon the generation. At the start of the business was the first generation entrepreneurial founder. This person succeeded on their own and persevered in the face of naysayers. The management style of this type of family business owner is often autocratic.
The second generation (a partnership of siblings) takes a more consultative approach to decision making, they try to talk with people they respect and trust and gain a consensus. They feel pressure to succeed and not “have the ship go down on their watch.” These family members are very financially conservative and eschew risk. They have concern for the generation that came before (the founder may still be active in the business) and responsibility for the third generation following them.
The third generation consists of a larger group of cousins. By this stage, the business has advanced to making decisions by voting. Governance mechanisms such as a family council and a board of advisors have been instituted to aid their decision making, thus making the business more rational and professional. Paramount to the family business are the mission and values of the business. If the business is in later generations, a major influence looming over every decision is the legacy of the founder. If a decision has the potential to harm the reputation of the founder or the social standing of the family in the community, it is immediately dismissed.
The family CEO may have the title and decision-making authority, however, there are other family members who often wield considerable power and can influence a decision. These family members stay in the shadows when decisions are everyday decisions. But, if the decision is not done every day, is seen as expensive, risky, has potential to harm the viability of the business, or does not match the mission and values of the firm, numerous previously unseen family members will appear literally out of the woodwork to influence the decision. This has the effect of at best delaying the decision, and at worst killing the proposal.
What Motivates Family Business Owners?