Family Business Hurdles: Seven Key Challenges to Watch Out For

In Kenya, family businesses contribute to about 75 per cent of the country’s Gross Domestic Product. Globally, family businesses account for more than two-thirds of all companies and provide between 50 per cent and 80 per cent of all employment. Family-owned firms can be top-performing companies in their respective industries. However, they are at the risk of family feuds that can overspill and adversely affect business operations.

Strong networks of family relationships, shared values and clear business objectives enable the family to forge a strong brand identity and united vision for their family business. Unfortunately, this same closeness of family relationships can also lead to disaster, due to conflicts between family members, and the difficulty in separating interpersonal relationships with business relationships. Family-owned businesses face some unique challenges, many of which stem from the nature of their business structures. If you are a family business owner, it is important to understand the common hurdles that can arise so that you can identify them and proactively develop ways to overcome them.

Eunice Muthoni, Head of Entrepreneurship Programmes at Strathmore University Business School, highlights seven challenges that family businesses need to watch out for. These challenges are based on her findings in her journey working with family businesses over the past decade.

• Rivalry Among Family Members. In many families, differences may arise when siblings feel that factors like age or education entitle them to more advantages than the others. This family rivalry can pull families and their businesses apart, often resulting in court battles and eventually causing irreparable damage to the reputation of the company and the eventual collapse of the family business.
• Failure to Incorporate Non-Family Professionals into Leadership Positions. For most families, matters pertaining to finances are considered private. As such, many family business owners fear opening up to non-family members. This cripples professionalism and limits business growth in the long run. My advice to family business owners would be to avoid limiting business continuity and sustainability by passing the baton to the wrong people and to avoid refusing to include competent individuals just because they are not family.
• Lack of Proper Financial Governance Structures. Many family businesses are SMEs and MSMEs and lack proper governance structures. Financial governance includes the ability to stay on top of compliance requirements such as IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles) and so forth. Good financial governance means that the business collects, calculates, and presents financial data as per international regulatory rules. Family businesses need to agree on formalizing compensation, expenses and budgets among other financial aspects. It is prudent to separate family business funds from family expenses.
• Failure to Invest in Training, Education and Upskilling of the Next Generation. Many family businesses rarely upskill the family members taking up various roles in the business. It is common to find that the family business owners do not appreciate or rather value capacity building. To increase your odds for survival, ensure that you invest in upskilling and capacity building for the next generation of family business owners.
• Downplaying the Importance of Research and Benchmarking Globally. Most family businesses ignore the importance of continued research and the need to benchmark with global family businesses. This limits knowledge. To grow, you need to look at what other family businesses across the world are doing and see what ideas and areas you can pick from them and implement in your own family business.
• Drawing Clear Lines Between Business and Family. Family is about unconditional love and family relationships while business is about making a profit. As your family business grows, you will find out that these two do not always align.
• Lack of Case Studies to Pass Down. Many family business founders have died without telling their stories. It is no wonder that there are children who take over the businesses after the passing on of the founder and do not understand the pain and sweat that goes into setting up and growing family businesses. Training institutions and institutions of higher learning must begin working on case studies of successful businessmen and women to document their winning formulae that can provide valuable insights to new generations.

Almost all companies start as family businesses, but only those that master the challenges intrinsic to this form of ownership endure growth, maintain collegiality and harmony as a family and achieve long-term success in their business.

The Family Business Executive Programme aims to impart practical skills and best practice insights needed to sustain family businesses through generations. Learn about the Family Business Executive Programme here

Article by Eunice Muthoni, Head of Entrepreneurship Programmes at Strathmore University Business School

This article was first published in Issue 12 of the ePreneur Magazine

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