Family businesses can be found across a variety of cultures, religions and backgrounds. Household names such as Frys, Rowntrees, Cadbury, Clarks and Barclays are all examples of successful businesses that have been founded by families and 71% of all SMEs in the UK are family-owned. But given that up to 95% of family businesses don’t stay in the family after two generations, how sustainable is a family business in the long run?
Understanding family businesses
Some of the problems that tend to plague family businesses include a lack of strategic thinking on succession planning for the next generation of company leaders as well as informal procedures and processes which, in the long term, may result in inefficiency and potential conflict.
But before arriving at a cure, it’s important to understand the dynamics of a family business and how it differs from other types of businesses, such as other SMEs. For one, not all SMEs are alike or are driven by profit maximisation. In fact, many family businesses are more likely to seek a minimum level of profit while balancing family and other pressures against greater profits.
Emotions can get in the way too and relationships between family members can carry over into the business, influencing how issues are decided. These inter-personal factors can mean that the people at the helm aren’t always making financial decisions that are purely rational. According to a recent study by Claire Seaman, Ron McQuaid and Mike Person, it’s perhaps more useful to recognise that family businesses are made up of overlapping family, business and social networks, which can influence how decisions are made.
The goals and values of the family may also lead to very different business decisions in terms of adopting technology or being reluctant to hire people from outside the family. For instance, in a paper published in the World Journal of Entrepreneurship, Management and Sustainable Development, Farid Ullah and Robert Smith argue that while family businesses claim that employment regulations stop them employing outsiders to the firm, the fact that it’s often cheaper or easier to employ family members could be a bigger deciding factor.
A road to sustainability
There have been a number of approaches aimed at supporting small businesses as well as potential high growth companies, such as improving attitudes towards entrepreneurship and giving firms access to research and development technology, advice, finance, and training. But these approaches shouldn’t assume that family businesses have the same long-term goals. Policies need to be adapted accordingly, taking into account the varying objectives and pressures on family firms.
And it’s not just sustainability in terms of survival and passing a business down to the next generation that counts as success for family businesses. For a small minority, family businesses can be important seeds for the long-term development of future market leaders, regardless of their changes in their ownership. With family businesses making up such an important part of the economy, it’s vital that policies understand the myriad of factors at play.
This article was written by Ronald McQuaid, a professor at the Stirling Management School, University of Stirling. It comes courtesy of Emerald Group Publishing, the academic publishing company that’s supporting sustainable global entrepreneurship.