Familosophy v7#1 - January 2024

Risk in Family Business

Business risk is something we think about, and which keeps us up at night, but we don't always approach it in a proactive and structured way. A gambler takes risk (and enjoys the ride); an entrepreneur manages risk.

Family businesses have certain features that lead to additional risks compared to other businesses. Indeed, some of the perceived strengths of family businesses are a double-edged sword that have corresponding risks.

One of the features of family business is concentration of ownership which often leads to an ability to make decisions quickly. This makes family businesses more nimble, able to respond to changes in market conditions, and not weighed down by bureaucracy. But quick decisions are not always good decisions. Just because we can make a quick decision doesn't mean we always should. The risk for family businesses is, out of an aversion of bureaucracy, they make decisions quickly without due consideration of relevant factors. The key is to strike the balance between running a business by the seat of ones' pants versus going through an unwieldy corporate hierarchy. Professionalisation and bureaucracy is a "necessary evil" as businesses grow so it should be a case of just as much as absolutely necessary.

Having owners and senior management that are aligned in their values and purpose and that trust each other is another huge advantage for family business. It means that everyone is on the same page. However, there are a number of risks that come with the territory. Firstly, there is groupthink: a lack of diversity in the decision-making body and a high value placed on maintaining harmony can lead to a lack of robust debate and an inability to consider alternatives, and therefore poor decisions. Another factor around decision-making is the family dynamics around the table. If younger family members are either afraid to speak up or are not given a voice, the family misses out on what could be valuable alternative viewpoints. It’s often the things we don’t know that we don’t know that can come back to bite us.

Family members are a trusted source of human capital for a business, but not the only source. Non-family members are an essential part of the team, and there are risks around maintaining good HR policies. Remuneration policy for family members is very important – it’s always best to pay everyone their replacement cost rather than treat the business as a bottomless pit from which all family members draw whatever they need. Any ceiling (perceived or otherwise) for non-family member employees can translate to a risk around retaining good talent. And while family members are generally committed for the long term, they are human and aren’t there forever. Any business continuity plan worth its salt must consider the key person risks of family members in the business. If someone is indispensable, then they can never take a vacation. That’s not good for the business or the individual.

Perhaps the greatest risk for family businesses is not having a formalised approach to risk. Depending on their size and maturity, risk often tends be something that keeps getting pushed to the back burner while other, more operational issues are prioritised. But issues like key person risk are present and actually greater in small businesses. A formalised approach to risk doesn’t have to go as far as a formal assessment and development then monitoring of a risk register. It starts with having the appropriate forum to think about and discuss business risk – this can be as simple as making it an agenda item on a monthly meeting and doing some preparation ahead of the meeting.

Conversation Starters:?What “urgent” situations that your family business has dealt with could have been either avoided or mitigated with risk policies? How often does your family business formally discuss risk? Who is responsible for identifying risks that should be discussed by the leadership group?

For further reading on this topic and further discussion, click here?

I’ve just completed a guide on how to get ready for a family business transition. If you’d like a copy, please click here.