Is Your Family Business “Leaking” Money?

Family businesses have many strengths which generally flow from their values of loyalty, harmony and long-term views of ownership. I believe these values account for a large part of the success in family firms, and also are part of the reason that family-owned enterprises typically out-perform non-family businesses globally.

However, even a strength – when over-used – can become a weakness, and family companies have a few common ways they “leak” value and profitability.  We regularly see these leaks in client firms, and find that some leaks they know about, while others occur in their “blind spot”. It is our job to help them see these value-destroyers, and come up with ways to reduce the impacts to the bottom line.

In no particular order, here are 5 ways family businesses typically “leak” dollars:

  1. The Blessings and Curses of Loyalty – Many families see their business as a way to provide employment for family members and friends. This can be a strength and can create loyalty in return from its people. However, when coupled with weak (or no) performance reviews and a desire to avoid conflict in the family, far too often there is under-performance by staff, that would never be tolerated in a non-family company.
  • Improper or Unqualified Hires – Of course, such sub-optimal hiring predictably results in under-performance, and the cycle continues to spiral down. We are always quick to point out that while the initial hire (or avoidance of dealing with non-performance), may seem compassionate, ultimately, such an approach does no one any favors and may even set someone who is cared about deeply up for failure.
  • Insufficient Focus on Systems and Processes – This may be related to not having people with insufficient skills to build the right kinds of processes. It can also be a result of another common family value – frugality. We regularly see companies who have the financial capacity to upgrade their systems and processes (think cash flow management, performance review systems, internal communications, and marketing) which would help them grow the business, reduce conflicts, minimize risk and prepare for the future. Yet, they hold back on the required investments of time and money because “it costs too much.”

This approach offers a false economy.  Prudent investment is needed to get ahead of the challenges every company faces as it develops over time. In our work, it is often the next generation of the family who sees this most clearly, but they typically face an uphill battle with their elders to make changes which are actually needed.