Misconceptions of Family-Owned Businesses

  • First Bank
  • 04/18/2022

Innovation, entrepreneurship, and a long-term view drive generational success

If small businesses are credited as the engine of the U.S. economy, family-owned businesses generate the power. According to the U.S. Census Bureau, approximately 90 percent of American businesses are family-owned or controlled.

Varying in size from two-person partnerships to global enterprises, family-owned businesses account for more than half of the country’s employment, half the U.S. gross domestic product (GDP), and nearly 80 percent of new job creation1.

However, misconceptions persist that family-owned businesses are fly-by-the-seat-of-your-pants operations destined to fail within two or three generations. 

The family-owned businesses of today have proven they can not only survive but thrive. From navigating labor and supply chain issues to leveraging technology to meet the needs of a socially distanced society, these companies are focused on long-term growth through entrepreneurship and consistently innovating to meet the needs of a changing world.

Still, misconceptions of family-owned businesses persist. The following are a few to keep in mind and manage against.

Human capital is a readily accessible commodity.
It can be challenging for any business to attract and retain highly-skilled employees, but this is particularly true for a family-owned business looking to hire employees who are not part of the family. These employees may have concerns about nepotism, potential favoritism during disputes, or being forced to navigate family conflicts.

Today’s strong economy and tight labor force are exacerbating this problem. Attracting and retaining high-quality workers is a serious issue facing companies of all sizes right now, and companies are competing with one another to find a willing and able workforce to fill a variety of open positions.

Further, the shift in working habits such as the desire to work remotely and the demand for better wages and greater flexibility means these businesses need to invest even more in the workforce than they potentially anticipated – particularly as companies compete for talent across multiple markets. For example, a sales representative from the Midwest might not command the same salary as one based in California, but both could do the job in Texas while working from home.

During a challenging labor market, it could be tempting for a family-owned business to rely on family members to fill open positions, but outside hires should still be strongly considered. Non-family member employees can serve an important role in helping balance potentially unstable dynamics while also providing an impartial and fair perspective on a variety of business issues.

It’s important for family-owned businesses to budget for what is likely to be a long-term increase in the cost of hiring and retaining skilled workers. Those looking to fill positions will also need to budget additional time to market and attract necessary talent.

However, when hiring family members, it’s important to first determine the specific qualifications and desired skills required for a potential hire to be successful in a specific role and then determine the family member most suitable to the position.

Rushing to hire a family member to fill an open role can be a mistake because, once hired, it might be a challenge to let him or her go. It is also wise for a family business to make it a well-known policy that it only hires the best talent for the right role, regardless of relation. Further, because it can be challenging to split profits and dividends without squabbles, tying salary bands to job descriptions and ensuring the salaries offered align against industry standards can also be helpful.

Succession is a given.
It’s critical for family-run businesses to have a well-established, clear succession, and estate plan in place.

As small, family-operated businesses grow, the success of the company often takes precedence over an eventual transition of ownership or a specific successor when the current leader decides to retire or dies. But, ensuring a plan is in place that defines how the business will be passed along is critical to the company’s generational success.

Nearly half of family-owned businesses do not have any succession plan in place5 and, even though nearly 70 percent of family businesses plan to pass it to the next generation, only 30 percent will be successful in doing so6. Delaying a succession plan discussion can lead to significant problems like a resistance to change by older family members, which can hinder the growth of the business or, worse, completely end it.

Succession and estate planning is a complex and lengthy process with many questions at play. Will the business be transferred to a trust, to family members, or to employees? And, when will the transfer take place? Will it be a gradual shift with oversight by current leadership for a set period of time? Or, is there a clear leader who is ready to step in immediately?

During the succession planning process, there are three areas to consider: economic benefit, control of the business, and tax reduction. With that in mind, it is important to engage a financial planner, a tax professional, or a family business consultant who can help guide discussions and provide unbiased guidance on potential plans. Of equal importance is to keep the lines of communication open, ensuring family members are aware of intent ahead of time to mitigate potential problems in the future.

Read more about succession planning from First Bank or watch this webinar from First Bank’s Center for Family-Owned Business.

A family-focused culture hinders growth.
The Family Capitol 750, a global list of the largest family enterprises by sales, lists the U.S. as the No. 1 center for top family businesses with 165 of its companies in the top 750, including Walmart Inc., Berkshire Hathaway Inc., and Ford Motor Co., among them.

A family business that builds its success on a foundation of shared culture will likely grow. While all priorities might not align across family members at all times, a family business is often unified around a very specific core set of values and a deep-seated desire to maintain a positive reputation.

This deep connection to each other and to the business itself is not easily replicated by non-family-owned companies, even those with the strongest corporate cultures. This is a powerful driver and helps lead to higher worker motivation and leadership4 as well as an environment primed for innovation3, future success and significant growth.

That said, it is important for family-run companies to practice good governance to help keep the family and business in check through a supervisory or advisory board, which can provide impartiality and balance when the company is facing challenging business decisions and internal conflicts.

A quality board of directors can also help new generations of family members gain important skills and management experience that will be critical to advancing long-term goals and succession.

Because younger family members may inherit wealth without financial literacy or skills that will be needed to eventually lead a company, it is important to engage them on the family business at an early age. They should be involved in business decision discussions to gain an understanding of the preferred approach, rationale behind specific choices, and have insight into wealth management issues.

Education, particularly in the day-to-day practices of the business, should always be top-of-mind to ensure generational success; however, of equal importance is the recognition that younger generations bring a new way of thinking to the company, are up on the latest trends, and are more technologically-savvy than their counterparts.

New generations of leadership are an important ingredient when it comes to innovation and strategic planning to avoid stagnation.

Family-owned businesses are stuck in their ways.
The leadership of family-owned businesses are accustomed to the ebb and flow of success over time. These business owners understand that, in order to stay relevant, they must constantly evolve.

While it can be common for family-run businesses to work with customers, vendors, and suppliers over many years, decades, or even generations, the most successful companies are not loyal to a fault. They are regularly evaluating existing relationships and how they impact the company’s bottom line.

In today’s environment of supply chain shortages, these long-term relationships deliver value as long as the costs are aligned with industry standards. If not, these businesses should explore options, look for ways to innovate, and make adjustments accordingly.

So, what’s next?
Family-owned businesses are forward-thinking entrepreneurs that are adept at seeking out opportunities, planning investments, and focusing on innovative ways to accomplish their goals and drive growth for generations to come.

If you are looking to grow your own family-run business, First Bank can help. First Bank offers a variety of products and services to help family-owned and privately-held companies achieve success over the long-term including estate and legacy planning, charitable and tax planning, commercial lending, and more.

With more than 100 years of independent, single-family ownership by the Dierberg family, First Bank is uniquely positioned to understand the needs and challenges of other family-owned and privately held companies. Our four generations of reliable ownership offer the stability and experience needed to help businesses plan for the long term and ultimately thrive.

Learn more about First Bank or visit the Center for Family-Owned Businesses.



1) Inc.com

2) Familybusinesscenter.com

  • 1: Astrachan, J.H. and Shanker, M.C. (2003), Family Businesses Contribution to the U.S. Economy: A Closer Look. (https://www.kennesaw.edu).
  • 2: Ibid.
  • 3: Greater Washington D.C. Family Business Alliance. Family Business Fun Facts. Retrieved November 2012.
  • 4: 22 The Economist. To Have and To Hold. Retrieved May 2015: (http://www.economist.com/news/special-report/21648171-far-declining-family-firms-will-remain-important-feature-global-capitalism).
  • 5: 2016 Family Business Survey. Retrieved February 2017 (http://www.pwc.com/gx/en/services/family-business/family-business-survey-2016.html).
  • 6: Peak Family Business Survey. 2011. Retrieved June 2014: (http://www.amserv.com/index.cfm/page/Family-Business-Statistics/pid/10715.html).

3) Daniels College of Business at University of Denver