Unique Risks Family-Owned Businesses Face
January 10, 2024 by Interchange Capital Partners
By Ahmie Baum, CFP® CFBA
Family-owned businesses have several strengths and advantages. For instance, many boast a potent, familiar identity that inspires commitment. Still, the nature of family-owned businesses presents them with a unique set of challenges that other businesses don’t encounter.
Sometimes, in the day-to-day running of the business, these challenges are hard to perceive, let alone diagnose. But what exactly are these challenges, and how can they be met and overcome?
The Most Pressing Risks to Family-Owned Businesses
Family-owned businesses must contend with a great many obstacles. The following are some of the most complicated and difficult to resolve:
Family Relationships
Families deal with an emotional component that corporations do not. This factor may result in strained communication, difficulty with conflict resolution, and trouble with basic business operations. Complex relationships and behaviors could play out in challenging ways.
Succession Planning
Having a clear succession plan in writing is one of the most critical needs of family-owned businesses. Without it, families run the risk of creating a leadership vacuum, introducing the potential for deeper familial disputes and business challenges.
Successor Readiness
On top of having a clear succession plan, family businesses need to see to it that the future leaders they’ve picked are truly qualified for the job. Generational experience and knowledge don’t always pass down to successors, and this could lead to ineffectual company-wide performance.
Informality of Operations
Some families know each other so well that they take a relaxed attitude around each other. But that casualness doesn’t always translate well to the business. Family businesses can’t grow or scale operations without a defined, professional structure everyone understands.
Estate and Gift Taxes
A transfer in ownership at succession time can expose a family business to unexpected tax liability. Being up to date on current regulations addressing estate and gift taxes is of paramount importance.
Ownership Concentration
If the managerial power of a family-owned business is concentrated in just a few hands, it could make it hard to raise capital and have a successful succession. External investors may think that the ownership, once gone, will require more time and money to build effective next-generation leadership, making them less confident about the business.
Legal Issues
When family members deal with personal legal issues, isolating them from the family company’s legal affairs may be difficult. Divorce, estate planning, voting rights, debt, criminal acts, and other issues can affect the company’s legal and public standing.
Competition
Even the biggest family-owned, independent businesses face stiff competition from corporate entities in the marketplace. The pressure can increase, and family-run companies are under tremendous pressure to earn profits and drive sustainability. The effect on the business can be devastating.
Balancing Work and Family Concerns
Every member of the family has varying ideas and motivations for running their business effectively. If family arguments and disagreements are allowed to fester and grow, it could generate feelings of tension that could trickle down to daily operations.
How Family-Owned Businesses Can Overcome Their Issues
The first step in overcoming issues is to recognize that business owners must navigate the 4 interchanges: the individual (themselves), their families, their businesses, and their ownership. This recognition leads to an understanding that strategies and solutions will naturally differ for each interchange. However, the starting point is always the same: gaining clarity around the best outcomes and identifying obstacles that prevent them. This clarity enables everyone to move into action with a common purpose and design, capturing opportunities and supporting everyone’s unique strengths.
Interchange Capital Partners is squarely focused on family-owned businesses. Our mission is to guide families through the 4 interchanges, navigating the known and the unknown, to protect and grow family capital—all so they can experience bigger futures with harmony, structure, and success.
One of Interchange’s success stories involved helping a family-owned C corporation save millions in taxes. We found ways to:
- Route contributions to donor-advised funds
- Eliminate the first $10 million of the company’s capital gains
- Help leadership start their own $23 million line of credit
- Gift limited partnerships to spousal trusts
- Perform other tax-saving measures
Many family-owned businesses don’t have the time, talent, temperament, or tools to navigate the 4 interchanges and have an outdated model for advice and counsel. That’s why Interchange has made serving family businesses our ongoing priority. Whether your family business has a long legacy or is still emerging, we have the resources to help you stay competitive in your market.
Get Help From Interchange
We at Interchange Capital Partners utilize our Clarity Foundation™ to engage you in a robust exchange of ideas and actions to preserve and grow your wealth. Our firm has a singular objective of helping you fulfill your aspirations and dreams, for your family, your business, and your legacy.
Our Second Opinion Service focuses on developing personal, trusting partnerships to help our families succeed. Email us at team@interchangecp.com or call our office at 412-307-4230 to schedule an introductory appointment.
About Ahmie
Ahmie E. Baum is the CEO and Founder of Interchange Capital Partners. Using a collaborative and comprehensive process developed over 43 years of working with wall street banks and financial services firms on behalf of families.
Interchange Capital Partners provides family office and transition strategy services for family businesses, helping families protect and grow their family capital with clarity, understanding, and action by being relevant and resourceful around their unique circumstances.
As a graduate of the University of Pittsburgh, Ahmie began his career with EF Hutton in 1979 and transitioned to UBS in 1993. Ahmie is a CERTIFIED FINANCIAL PLANNER™ (CFP®), received the Executive Certificate in Financial Planning from Duquesne University School of Leadership and Professional Advancement, and has a Certificate in Family Business Advising (CFBA) from the Family Firm Institute. He also has Certificates from The Growth Institute around Growing and Scaling Business and Cash Management. For the past 20 years, he has been involved with Strategic Coach, an international entrepreneurial training program.
When he’s not working, Ahmie enjoys spending time with his wife, Sara, their three children, and their granddaughters. He recognizes that health is wealth so he has committed to daily yoga, meditation, and plant-based eating. His other hobbies include woodturning, golf, reading, listening to music, and biking. He is active in his community and served as the Foundation Chair of the Jewish Federation Community Foundation of Greater Pittsburgh and supports various philanthropic endeavors. To learn more about Ahmie, connect with him on LinkedIn.
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