Disadvantages of Family Firms include:

Lack of interest among family members: Sometimes, family members aren’t truly interested in
joining the family business, but do so anyway because it’s expected of them. The result is
apathetic, unengaged employees. In the public sector, employees that fit into this category would
simply be fired. It’s not so simple at the family firm.

 Family Conflict: Conflict is bound to happen at any firm, but add in long histories, family
relationships, and the kind of contempt that comes with familiarity, and the ante has just
been upped. Deep-seated, long-lasting bitter fights and quarrels can affect every single
person within the firm and can draw divisive lines. Because family members are involved,
conflict can be more difficult to solve and can result in difficult endings. In 2005, a famous
dispute between the sons of Reliance Industries founder Dhirubhai Ambani, Mukesh and
Anil, divided India’s largest petrochemical manufacturer. When all was said and done
Mukesh retained control of the petrochemical business, while Anil became chairman of
Reliance Capital, Reliance Communications, and Reliance Energy.

 Unstructured Governance: Governance issues such as internal hierarchies and rules, as

well as the ability to follow and adhere to external corporate laws, tend to be taken less
seriously at family businesses, because of the level of trust inherent at family firms.
Unfortunately, this can be gravely detrimental. Take the example of Samsung Group, whose
chairman, Lee Kun-Hee, was forced to resign in 2008 after being indicted for tax evasion and
criminal breach of trust charges. While his three- year sentence was suspended, a fine of
$109 million was still imposed. In this situation, a little governance would have gone a long
way.

 Nepotism: Some family businesses are reluctant to let outsiders into the top tier, and the
result is that people are given jobs for which they lack the skills, education, or experience.
This, obviously, has a far-reaching effect on the success of the company. In particular, it’s
very difficult to retain good talent at lower levels if their performance, and their ability to
succeed in the long run, is consistently being affected by incompetence at higher levels.
More family firms are recognizing this issue and are taking care to strategically place
outsiders in certain positions when necessary.

 Succession Planning: Many family firms lack succession plans, either because the leader
doesn’t have the desire to admit that he or she will, one day, need to step down, or because
there is too much trust in the family to work this out when it becomes necessary. In fact,
because of close relationships and long histories, it is of utmost importance in family firms
that a strong succession plan is in place.
 Lack of skills or experience – some family businesses will appoint family members into
roles that they do not have the skills or training for. This can have a negative effect on the
success of the business and lead to a stressful working environment.
 Family conflict – conflict can arise in any business, but it’s important to consider that
disputes within a family business can become personal as the staff are working with the
people closest to them. Bad feelings and resentment could destabilise the business'
operations and put your family relations at risk.
 Favouritism - can you be objective when promoting staff and only promote the best person
for the job whether they are a relative or not? It is important to make business decisions for
business reasons, rather than personal ones. This can sometimes be difficult if family
members are involved.
  Succession planning – many family business owners may find it difficult to decide who will
be in charge of the business if they were to step down. The leader must determine
objectively who can best take the business forward and aim to reduce the potential for future
conflict - this can be a daunting decision.

 Mixed interests

In a family business, there is a risk that your family interests would be mixed with the
corporate interest. Misunderstandings at home could also be brought to the office and the
family expenses could be deducted from the business. However, some businessmen have
solved the problem. Take it from Abdulrahman Al Zamil, chairman of Al Zamil Group. He
supports transparency and even came up with documents to separate the interests of family
and business.

 Poor performance

One truth about running a family business is that some of the family members might
become too comfortable, knowing that they are in the business with the people closest to
them. The result of this nonchalant attitude is poor performance, lack of formal planning and
budgeting.

 Management with Sentiments

Family businesses also tend to appoint family members even if they lack training or
experience. The head of the family wants to turn over the business to his first son or favorite
child, even if such a person is not competent. Take for instance the chairman of Kikkoman
Corporation, Yuzaburo Mogi, he went to Columbia University to get a degree so as to avoid
ruining the business.
He is even the first Japanese to get an MBA from the said university. To further curtail the
risk of ruining the family business is to take a cue from Mayer Amschel Rothschild, who
delegated duties to his children according to their strengths, skills and weaknesses.

 Lack of openness

Another big disadvantage is that there is a temptation of keeping the business to the family.
Most family businesses are tightly run by the family and very few outsiders. Now outsiders
may work in the business but they won’t be in the top management or have decision making
control.
Note that outsiders might have ideas and skills that can be useful to the family business but
their ideas won’t be incorporated because they are outsiders. Take it from the Auchan
Group which is owned primarily by the Mulliez family, while about 12% of shares are owned
by the employees.

 Rivalry between family members

Of course, not all family businesses succeed all the time. If it goes down, there is a risk that
family members start to hate and blame each other. If the head of the family dies, there tend
to be fighting and scrambling for the business assets among the kids. Even when the head
of the family writes a will and split the assets accordingly, there still tend to be hate and
rivalry.

 Lack of business continuity or successful succession

Most family businesses lack a continuity plan. The business is run entirely by the family that
the head feels that the smooth operation of the business will continue even after his demise.
Lack of a succession plan is the reason why most family businesses don’t survive after the
death of the founder. The founder’s survivors usually lack the competence and passion to
run the family business.

 Risks associated with not having a strong succession plan include poor leadership, family
quarrels and often financial or legal trouble for the company. Founder of Hyundai Motor,
Chung Ju-Yung, named his son, Chung Mong-Koo, his successor in 1999. Just a year later,
Chung Mong-Koo defied his father’s orders to step down.

In 2007, Chung Mong-Koo was convicted of embezzling funds from the company in order to
buy corporate favors from the Korean government. As you can see, a well-run family
business is capable of having a positive impact not only on the family involved, but also on
the local and global economies. Family businesses are capable of promoting
entrepreneurism, generating wealth and security for families and for providing employment
opportunities for those in the community.

Unfortunately, the things that make family firms so wonderful are the family involvement, the
highly personal relationships, the inherent loyalty and commitment, the flexible structure, but
they also make them challenging to sustain for the long term. The goal, then, is to recognize
and understand both the strengths and the weaknesses of family businesses, in order to
better manufacture long-term success.

Key Considerations:
1. Build a long-term vision for the family business that is compelling and gives purpose to why you are
doing this.
2. Consider the type of family business structure you want to build and test out whether it can last three
generations.
3. Understand what family conflicts are brewing, that need to be resolved with some professional
mediation and coaching In a future article, I’ll introduce you to the DNA Model. I’ll show you how to
ensure you have all the strands necessary to develop a successful business and how to weave those
strands together to ensure your business is strong, enduring, and successful.