Is Family Business Right for You? 10 Advantages and Disadvantages

Is Family Business Right for You? 10 Advantages and Disadvantages

by Jennifer Xue

Family has been the bedrock of the society for millennia. It’s, thus, natural to ask family members to support a new business. While it’s a great idea to have the support from family members, it comes with both pros and cons.

Both the advantages and the disadvantages of starting a family business are equally strong. Keep in mind that formation is an important step. Making the decision to start a family business shouldn’t be done lightly. While making profit is the starting goal, it shouldn’t be the only goal. Long-term longevity should be the ultimate goal. Begin with considering these advantages and disadvantages.

Here are the advantages:

First, human and social capitals.
Family members have various skills that they can bring to the business. They also likely have various groups of friends and circles that can expand the business’ networking and customer base.

Second, low starting cost.
Most family members are willing to work for free or with very little compensation to ensure that the business is taking off and starts rolling. It saves a lot of startup capital compared to paying full-time outsider employees.

Third, stability and commitment.
Family members are excited about their business, thus they are likely to contribute their time and resources without reservation. This commitment brings stability in the first few years of the business, which is a crucial formation period in any business.

Fourth, emergency funds.
Most startups have liquidity or cashflow issues in the first few months of business formation. Having a team of committed family members who are willing to lend their own cash to the business would be tremendously helpful in cashflow emergencies.

Fifth, long-term outlook.
Family members are likely to stay for a long time, knowing that the profits go directly to them. Thus, while most non-family businesses have short-term quarterly goals, most family businesses have long-term yearly targets. This explains why family businesses may last as long as three generations, provided that they are managed properly.

The disadvantages are:

First, lack of discipline.
Family members may think that they “own” the business, so they can have the most flexible working schedule. They may also undermine important management issues, like organizational structure, protocols, and standardizations. This would lead to poor succession planning, which would shorten the lifespan of the business.

Second, family conflict and mixing family and business issues.
A family business is prone to conflicts due to mixing family and business issues. Emotions can run high in a family business, resulting in endless quarrels, which can cause negative influences in the business.

Third, lack of structure and poor management.
When a family business lacks proper corporate structure, they violate the Corporate Law and can be fined. Not only that, it can also ruin the workflow and business professionalism. Be extra vigilant in ensuring proper management and corporate structure are in place.

Fourth, informal culture and nepotism.
Since most workers are family members, an informal culture is likely apparent. While a small dose would be good for the morale, a totally informal culture would cause confusion and lack of respect for structure and proper managerial flow. Adding nepotism to the mix, where a family member is usually lenient to fellow family members, the business is at risk of premature collapse.

Fifth, failed succession.
Successful succession depends on strong structure, good professional culture, and good governance and management. The founder must have humility to accept that he or she must someday step down. Due to tight familial relationships, which can sometimes cloud one’s professional judgement, succession can be quite challenging. Thus, a strong and clear succession planning must be in place early from the beginning.

Jennifer Xue is the Founder and Chief Editor of SiliconValleyGlobe.com.

Image Source: Pixabay

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