When a Family is Bad for Business

Author

Mr FamilyOffice
February 23, 2024

When a Family is Bad for Business

“The family is a sh!t show and they’re gonna kill the business”

That was the complaint from a friend of mine who serves on the board of a mid-sized manufacturing company

Over lunch last week, he told me how the demands of the family shareholders are slowly bleeding a good company dry

The manufacturer, with plants in Europe and the Far East, maintains a solid customer base, but is experiencing a gradual decline

It’s family-owned but no longer family-managed

Founded over 40 years ago by a self-made entrepreneur, the company produces specialist manufacturing equipment. With his brothers joining, it quickly expanded, securing a market position and becoming a reliable source of annual dividends

After the founder and his brothers passed, share ownership spread across their families, leading to about 15 shareholders, mostly from the extended family 

After the founders had passed away, management was transferred to professionals

That’s when the problems started. While the professional management lacked the entrepreneurial drive of the founder, they were competent and professional. They were looking to manage the company for the long term. The problems stemmed from the shareholders

The family is disparate and increasingly disconnected. But they are able to put up a united front when it comes to their demands of the family business. They still regard the business as a cash cow… and they want to see that cash every year

Despite increasingly urgent appeals from the board (and some resignations), the shareholders won’t budge on their demands for a fixed annual dividend

It appears that the family are totally reliant on the substantial annual dividends to fund their lifestyles

At the moment this is possible - legacy contracts mean the business is still generating profits and cashflow

But the business environment is changing, margins are tighter, competition is higher. While the company is profitable, it is being drained of cash and starved of investment

The family are convinced that the company is invincible

As my friend observed - the reality is that the company is being slowly run into the ground

Why family businesses are usually good businesses

Let’s be clear - this is unusual. Family businesses are often highly successful

I know funds that only work with family businesses

So for balance, here are some reasons behind the enduring success of family businesses:

🌱 Strong Values and Culture: Family businesses typically have a strong set of core values and a culture that is passed down through generations. This shared value system can cultivate loyalty, commitment, and a sense of purpose among family members (think Walmart)

🕰️ Long-term Perspective: Unlike publicly traded companies, family businesses often take a long-term view in their decision-making processes

This perspective allows them to focus on sustainability, legacy, and growth over generations, rather than short-term gains

🤸 Agility and Flexibility: Family businesses can be more agile and flexible compared to larger corporations. The close-knit nature of family businesses allows for quicker decision-making processes and adaptability to changing market conditions

💖 The Personal Touch: A hallmark of many family businesses is their emphasis on building strong, personal relationships with their customers, leading to higher customer satisfaction and loyalty

💡 Innovation Rooted in Tradition: While honoring their traditions, family businesses are often at the forefront of innovation within their industries. The blend of respecting the past while embracing the future can lead to unique business models and practices

👥 Unified Leadership: Leadership within a family business is often more unified and aligned in its vision for the company. This unity can streamline decision-making and enhance strategic coherence.

🤗 Employee Loyalty and Retention: Family businesses frequently treat their employees like family, fostering a work environment characterized by respect, care, and mutual support. This approach can lead to higher employee satisfaction, loyalty, and retention rates. They say there are no more jobs for life… but there often are in family businesses

❤️ Intrinsic Motivation: Family members involved in the business often have a deep-seated emotional investment in its success, which can drive higher levels of dedication and perseverance compared to non-family businesses.

As a result of these factors, family businesses can be resilient and enduring businesses

But not always

In the case of my friend's company, the family's detachment from daily operations has led to a lack of understanding of the business's needs and challenges

The family is the problem

With their demands for distributions, they are “slowly killing the golden goose”

My friend laments the entitlement and laziness of a family who he describes as spending their lives on “high-end welfare”

It feels to me like such a missed opportunity - an opportunity to run the company as a proper family business, to invest and to grow and create durable and enduring generational wealth

(And of course, to open a family office)

𝕏 highlights

My kind of site-seeing:

Family office compensation 2024 vs 2023:

The transition from founders to inherited wealth:

📚 what to read

The New Leviathans - Thoughts after Liberalism by the British philosopher John Gray.

In a sharp criticism of liberalism, Gray explores liberalism through the lens of the fall of the Soviet Union, the rise of China and the emergence of “hyper-liberalism” (the woke movement). A little deeper than my usual literary choices, but thought-provoking

📻 what to listen to

In the How I Built This podcast, Guy Raz interviews the world’s leading entrepreneurs. A fascinating episode is the interview with Joe Gebbia on how a chance encounter turned into an idea that turned into Airbnb

📺 what to watch

An interesting short video about how family offices will revolutionize business

📰 family offices news roundup

And finally…

I’m on the lookout for more family office profiles

One of my early newsletters was a profile on a Canadian Virtual Family Office

People liked it and would like to see more profiles

I’ve also shared a few family office horror stories on X. but let’s focus on the positives!

If you would like to feature in a future newsletter - either anonymously or not - please get in touch

Right, that’ll do for this week, Happy Friday!

X