6 Challenges Facing Family Owned Businesses

Family businesses are very resilient. If you look at the oldest businesses in the world, most are family-owned. Nevertheless, family-owned businesses face their toughest economic conditions in decades, with uncertainty high, inflation at its greatest level in decades, interest rates on the rise and some experts warning that the country is already in recession. Here’s what family businesses believe are their biggest challenges. 

  1. Stagflation

Inflation is at its highest level in 40 years, driven by rising gasoline prices, global supply chain disruption, and the after-effects of the pandemic-era stimulus. Most business leaders have no memory of the last great period of inflation in the United States. Managers just don’t have the muscle memory to deal with inflation. 

Inflationary conditions demand that managers price products carefully, so they don’t get caught out. Businesses have to approach purchase decisions more carefully, especially in light of global supply chain disruptions which can lead to delays in receiving products. Some companies may find that they will have to buy more expensive inputs if those products are part of a more secure supply chain. 

Inflation isn’t occuring in a space all on its own. It’s occuring in the context of stagnant economic activity. This results in a phenomenon known as “stagflation”. Stagflation is difficult for businesses because prices are rising, while at the same time, the size of the economy isn’t growing.

  1. Recession

A recession is two consecutive quarters of contraction of the economy. The United States has gone through two consecutive quarters of economic contraction. However, the White House has suggested that the United States is not technically in a recession until the National Bureau of Economic Research (NBER) Business Cycle Dating Committee has determined that it has occured. Despite this technical point, it is likely that we are in a recession or will enter one. 

Many managers are looking to the government to implement measures to protect the economy. This puts pressure on businesses to reduce costs in order to maintain profitability. However, as we saw above, the United States is also experiencing inflation. Cost-cutting during the worst period of inflation is very difficult to do. With consumers cutting back, the usual response to reduce prices is also hard to implement when businesses are facing rising costs. 

  1. Rising Interest Rates

We have had low interest rates for so long that many people have forgotten or never experienced higher interest rates. That low-interest rate period is coming to an end. 

Rising interest rates mean borrowing costs go up. That makes it more expensive to fund measures to increase the value of the business. Firms will have to dig deep to use their internal resources more. This period will benefit cash rich firms that have used the last period of low interest rates to build up cash reserves. 

Businesses should try and extend the maturity of their debt to avoid short-term pressure. For more sophisticated managers, businesses should start thinking about using swaps and term facilities to hedge their interest rate risk. 

  1. The Great Resignation

Even before the pandemic, many American workers resigned from their jobs in search of greater work-life balance. During the pandemic, millions of Americans quit their jobs, accelerating this process, leading to what commentators have called, the Great Resignation. 

The Great Resignation challenges family-owned businesses in unique ways. Family businesses have to struggle with retaining non-family talent: if your business isn’t meritocratic enough, some workers may feel that they can rise faster outside the business, because they think family members are blocking their route. Workers need to feel that they have an opportunity to rise within your family. That adds a wrinkle to the search for greater work-life balance. Indeed, many people who resigned from their jobs felt that they were insufficiently appreciated within their businesses. 

A family business should try and have a broader sense of “family” so that family members don’t feel isolated within the business. Keep your workers engaged, and informed about the challenges the business is facing, and what you are trying to do to ensure the survival and success of your business. 

Family businesses should also try and get input from their non-family member workers. It’s important to listen to your workers, not merely because it makes them feel part of the organization, but because your workers are a vital source of knowledge that you really should tap into.

Another thing about the Great Resignation is that it is enabled by the rise of technology. Today’s knowledge workers can compete for jobs across the world through the medium of the internet. It’s a worker’s market. So businesses have to offer more attractive packages to workers in order to acquire and retain the best talent.

  1. Decision Making Under Uncertainty

Under uncertainty, decision making can be very difficult. This is perhaps the most difficult challenge that family businesses face. Although many business leaders point to their intuition as the basis of their decision making, well, everyone thinks their intuition is great. The best business leaders have clearly defined decision making frameworks that help them find the optimal path. 

One tool that is very valuable for decision makers is to use decision trees that map out possible paths and assign probabilistic weightings. For instance, if you want to decide between investing in one asset or the other, you can look at how each decision could possibly work out, and the likelihood of each path. In this way, you can find the path that is most likely to work out. 

Your business should also have a diverse pool of managers and workers who can tap into their diversity to get a broader range of decision options. Diverse groups are better at making decisions than non-diverse groups. By diversity I mean, not just demographic diversity, but also diversity of skills and experience. This will make decision making a more creative process. 

Finally, your business needs to have a clearly defined strategic goal. That goal must be the governing principle around which the entire business is operated. Every single decision must be assessed against how it helps the business get closer to achieving its strategic goal. Having this organizing principle is a great North Star during uncertain times. 

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Brett Sartorial

Brett is a business journalist with a focus on corporate strategy and leadership. With over 15 years of experience covering the corporate world, Brett has a reputation for being a knowledgeable, analytical and insightful journalist. He has a deep understanding of the business strategies and leadership principles that drive the world's most successful companies, and is able to explain them in a clear and compelling way. Throughout his career, Brett has interviewed some of the most influential business leaders and has covered major business events such as the World Economic Forum and the Davos. He is also a regular contributor to leading business publications and has won several awards for his work.