Drawing on the agency theory and the stewardship perspective, this article examines the extent to which nepotism and family conflicts affect the performance of family-owned firms in Tanzania. From a sample of 163 family firms and the Structural Equation Model (SEM) results, the article proffers that nepotism and family conflicts have no significant negative effect on both the financial and market-based performance of family firms. Contrary to previous studies which report that nepotism and family conflicts are detrimental to a firm’s performance, it demonstrates that the small family-owned firms operating in a developing economy with an inadequate institutional environment are better off by engaging committed and productive staff from those with a common family background and culture. Although the article supports the stewardship perspective on family enterprises, it indicates the need for further investigation into the impact of family characteristics on firm performance given the differing views that exist in academic literature.