Four reasons why family businesses fail

SmartCompany, March 1, 2018

Many of the world’s most successful businesses are run by multigenerational families. Walmart, BMW and Samsung are three prominent examples. But while over 70% of Australian businesses are family run, only 30% survive the transition from first to second generation and just 12% making it to the third generation.

What is it about family businesses that make them so susceptible to failure? The reasons are varied but there are some common themes that run through them. Here’s a list of four of those, along with actionable tips to assist in ensuring your family business prospers from one generation to the next.

Heirs lack financial education

Many children born into wealth are ill-prepared to manage money due to a lack of financial education from their predecessors. This results in poor decision making and puts the family’s capital at great risk. Families that also fail to nurture a sense of responsibility, history and family values in the generations to come, ultimately fail their business.

Educate your next generation about wealth and responsible financial management as early as possible. Protect family wealth by insisting on premarital agreements and separation of personal and family property.

A culture of nepotism

Families who continue to promote unqualified relatives into positions of power simply because they are members of the founding family are also on a fast-track to failure.

Professionalise the business by establishing employment standards for both family and non-family employees. Develop a family business employment policy which clearly delineates the following:

  1. How a family member gets a job in the business (i.e. do they follow a normal applicable process?);
  2. What experience they need;
  3. How they are remunerated;
  4. Detailed job descriptions; and
  5. Information pertaining to annual performance reviews.

In doing this, you may find it useful to use industry benchmarks to help you establish clear roles and expectations, particularly around salary.

Those persistent succession planning struggles

The vast majority of family businesses encounter difficulties when it comes to succession planning. According to the 2016 Family Business Survey by the National Bureau of Economic Research, 43% of family firms don’t have succession plans in place.

Many current generation leaders are also delaying retirement as they struggle with the reality of leaving their business in someone else’s — hopefully capable — hands. This further exacerbates the problem of succession planning as an unexpected illness or sudden death poses real risk to the business and the family’s financial health.

Start success planning now. Whether you intend to train up an internal successor or bring in outside managers, proper succession planning takes years. If you truly want to ensure your business will survive after transition or death, it’s critical you begin laying the groundwork early.

Be sure you don’t confuse estate planning with succession planning too. If you’re stuck on where to begin, my article about six simple steps for succession in family business may help.

A lack of family governance structure

Plenty of families are reluctant to address governance issues because it forces them to confront the possible need for major changes in how they manage their business. Governance structures formalise exactly who does what and how, but also provide a distinct line between family and business. Without family governance, it’s easy to fall victim to internal discord and ownership issues down the track.

Protect your business by instituting formal governance and ownership structures that clearly separate family control from the daily management of the business.

Consider bringing in professional managers to run the business while retaining ownership stakes for your family. Many successful multigenerational family firms do this as it allows them to focus on diversifying and managing their wealth as well as making it easier to navigate generational transitions.

That’s my brief rundown of the top four reasons why family businesses fail. Being aware of these hurdles is key to avoiding, or at least overcoming, them. I hope this information helps you open the dialogue necessary to ensure the continued success for your multigenerational family business.

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