Profit-killers can sneak into any business. But family businesses are at greater risk. Many members of The Network of Consulting Professionals have experienced this first-hand.
They either had their own family business(es), or worked in family businesses, or have been helping family-owned businesses to improve their profitability. For instance I ran my own logistics businesses with 3 other partners, and before that I worked for several family businesses.
What I often found was significant “profit leakage”. Or more accurately, insidious “profit-killers” were making these family-owned businesses far less profitable than they should have been. Eradicating the problem is not always easy, especially when the business has poor systems of management and governance.
These 5 Profit-Killers Wreck Family Businesses
1. Family member “employment entitlement”
Family loyalties and obligations are powerful forces! Relatives are often not treated as normal employees.
As a result, under-skilled relatives may be in positions for which they don’t have the skills, experience, training, nor the temperament. Naturally the business suffers from poor decisions, inefficiencies, errors, customer dissatisfaction, internal team frustrations etc.
Additionally their roles may lack clarity. Without defining clearly their purpose and responsibilities, and without accountability for performance, these family members cannot perform adequately. Such a situation leads to overall sub-optimal performance for small and medium businesses.
For instance I worked in a business where the owner employed his son. He was blind to the fact that the son was a poor worker and believed he was entitled to a job. Staff had no respect for him and therefore for the business. So the whole team’s morale and performance became significantly damaged.
2. One rule for family members, another rule for other employees
Bending the usual work rules for family members is another source of trouble. I have seen instances where spouses working in the business decided they were not subject to the same time keeping rules as other employees. The longer business leaders tolerate such behaviours, the more painful the fix becomes.
The impact of these double standards are rarely fully acknowledged. Yet they affect employee morale, motivation and productivity. Often this triggers a chain of deep issues cutting the potential for profitability and business longevity, directly and indirectly.
3. High employee turnover, particularly high performing staff
Top-performing non-family members may leave when they see positions clearly reserved for relatives. As they miss out on well-deserved promotions, they feel even worse when family promotions happen regardless of competence and fit.
Why would any good employee stay when non-performing relatives remain in their positions and are indefinite career-blockers? Many years ago, I too left a senior managerial position because I was twice passed over for a promotion, once when the position was given to the managing director’s brother. It felt even more frustrating as that brother was incompetent, lazy and generated little respect from staff.
Unfortunately excessive employee turnover further destroys profits as the business
- loses valuable talent and experience
- has to spend time and money on recruiting
- must wait for new employees to settle into their new positions, putting pressure on other employees and management
- experiences a further drop in employee morale.
4. Maintaining the Status Quo
Often family members become complacent and have other agendas. Over time they become resistant to change. As they stifle innovation and new ideas, more dynamic people stop trying to grow the business.
Leadership must come from the top and often we see business founders staying on too long in the business. Increasingly they fear risk and even growth, they block change. All too often they allow their egos rather than sound judgement to be the basis of their decisions.
The full impact is not always immediate but cascading events can lead to a severe long term effect.
5. Family tensions
Within most families, tensions arise that have nothing to do with the work environment. Unfortunately, they often spill over into the work situation. Usually this has negative effects on morale and operational efficiency and effectiveness.
For example, I witnessed a situation where a brother didn’t like a sibling’s spouse also working in the business. So he refused to talk or co-operate. It is never good when emotion rather than good management practice takes over.
Stop the rot before it is too late
Running a healthy, dynamic and profitable family business need not be difficult. With good management systems and clear accountability, family businesses can be more nimble, effective and profitable than larger businesses. The secret is being humble enough to recognise that
- there is a problem
- it is much easier to address it sooner rather than later,
- dealing effectively with the issue requires a rational and organised approach.
Unbiased external advice, guidance and mentoring are useful tools to improve company performance. It is much easier for external experienced business people to understand the business issues and the people dynamics. They are not constrained by family issues, they can be calm and logical, they can design and implement solutions that work for the organisation and the people. They can facilitate change, monitor the results, keep everyone accountable and feeling supported
So if one or more of the profit-killers listed here sound familiar, and you would like to turn your business around, get in touch with us at The NCP.
If you recognise the symptoms of the problem in a business you know, recommend to the business leader to take action now and call us.