Disadvantages of Family Business

As attractive as family businesses are on many fronts, they have the following disadvantages:

• Family businesses tend to be stable organizations. Although this is a good thing in many instances,

stability can also make it difficult to change. A new, younger family member coming into the business will

find tradition and structure. Changing that is not simple. The key to changing a family business lies in

defining tradition in terms of the company’s core values, not in specific ways of doing things.

• Family closeness can lead to sibling rivalry or problems when both the parent and the child want control.

By the third or fourth generation, with many cousins possibly sharing ownership, governance can become

very complicated.

• There may be times when the interests of a family member conflict with the interests of the business. One

family member may want to expand the business, but other family members may not share this person’s

desire. The needs of the business are not in sync with the needs of the family.

• Family ties have a downside. Family members will frequently be expected to work harder, make more of a

commitment, and get paid less than other employees in the business. [33]

• Family business owners may automatically promote someone from the family or give family members a

job even if they do not have adequate skills for the job. A nonfamily employee may be better

qualified. [34]This can cause dissension and resentment among other employees.

• Relationships between parents and children or among siblings have a tendency to deteriorate due to

communication problems. “This dysfunctional behavior can result in judgments, criticism and lack of

support.” [35]

• The family business may be a breeding ground for jealousies, resentment, anger, and sabotage. Family

problems may spill over into the workplace. [36]

• The business may be plagued with managerial incompetence, the lack of exposure to other businesses,

and the inability to separate family and work. [37]

• Some family businesses may have difficulty attracting and keeping highly qualified managers. “Qualified

managers may avoid family firms due to the exclusive succession, limited potential for professional

growth, lack of perceived professionalism, and limitations on wealth transfer.” [38] Succession refers to

passing the business to the next generation.

• Family businesses have limited sources of external capital because they tend to avoid sharing equity with

nonfamily members. [39] Having less access to capital markets may curtail growth. [40]

• Not all children of owner-managers may want to join the business. According to one

study, [41] 80 percent of those who did not work in the family business did not intend to go into

the business.