The risks and rewards of running a family business

Millions of families successfully own and operate businesses across every industry—from construction companies to restaurants to manufacturers, and everything in between.¹  Working together as family goes back millennia. This time-tested form of business has many clear benefits, but unique challenges and risks can arise as well.

If you’re considering joining forces with a sibling, parent, or child, or a long-established owner of a family company, it’s a good idea to understand what problems can arise so you can develop plans to thrive for generations to come.

Because family members share personal history and may be aligned on values, needs, and goals, a family business can have a strong united vision and focus. The benefits of working together as a family include:

• Stability and commitment — Members of the business may have a greater commitment to success and be more accountable to one another because they are family. Business leaders often stay in their position for many years, resulting in increased stability within an organization. Family members may also be more willing to make greater sacrifices for the sake of their business.
• Speed to market — There is typically less hierarchy in a family-run business, more shared knowledge, and a deep understanding of the business sector and competitive landscape. As a result, family-owned firms may be able to execute more quickly and efficiently on projects, product launches, and business decisions in general.
• Flexibility and cooperation — In a family business, there may be greater leeway to work flexible or part-time schedules since others in the family may have the knowledge and skills to fill in. Family members may be more committed to working as a team and willing to take on tasks outside of their formal job description to ensure the success of the company and the prosperity of the family.
• Early engagement and learning — When members of the next generation are invested in a family-owned business and have the opportunity to lead in the future, they are more likely to be involved in the business early in their lives. This early engagement enables them to develop the knowledge and skills to keep the business on track in the future. Younger generations may even grow up in the business and pick up key skills just by being exposed to the workings of the company.

Challenges to family-owned companies can arise when there is conflict between personal and business issues. The personal relationships and shared values that strengthen family-owned enterprises can become sources of conflict or uncertainty and weigh on operations. Key risks to be aware of include:

• Governance — Non-family-owned businesses often follow clear practices for governance, complying with both internal policies and external regulations. This is sound business practice, and it mitigates many operational risks. From ensuring the reliability of financial transactions to establishing strong cybersecurity standards, good governance reduces exposures and helps businesses survive and thrive. In contrast, family businesses may not formalize or follow their governance structure because of established operational practices and an inherent level of trust.  Without formal governance, the financial, reputational, and legal risks of running a family-owned business may increase substantially.
• Employee policies and guidelines — Every business should have clear company policies for hiring, training, and managing employees to ensure that all employees are treated consistently and fairly. The lack of such policies can cause conflict, impair productivity, reduce morale, and even result in employment-related liability lawsuits. Businesses may be exposed to liability or reputational risk when non-family employees demonstrate that they are being treated differently. The appearance of nepotism can also create financial and operational risks.
• Succession planning — Succession planning is critical to smoothly transition leadership in a way that maintains business operations and lays the foundation for future success. But succession planning can be complicated and emotionally fraught for family-owned businesses for many reasons. For instance, if two sisters with several children run a family business along with their five children, which member of the younger generation will become the future company leader? Or what if none of the children wants to lead the business? In some cases, hiring a leader from outside the family may make sense. Whatever successor is chosen, it’s important to train the future leader in advance of the transition and before a crisis arises.
• Business ossification — Succession challenges can also impair a business’s ability to innovate and grow. An older family business leader may not want to step aside — even if the business needs new energy and ideas. While a long-time family business leader may provide stability, maintaining the status quo can also represent a competitive risk. Following long-established, family practices can also prevent a business from making needed changes such as investing in new technology.

Family-owned businesses may be able to improve operations and better support both family and non-family employees by taking a clear-eyed look at their practices and policies. Ask what steps you can take — such as developing a written succession plan or employee handbook — that will help prevent challenges or liability down the road.

You may also want to consult with professional advisors — such as an attorney, accountant, management consultant, and insurance professional — to get your family business started on the right foot or strengthen an established family-owned firm. An insurance agent or broker can help you identify where coverages can help protect your business for today and future generations.