Why Do Family Businesses Fail

What's one thing that causes most family businesses to fail? With a considerable percentage of companies in the country being family operated, most of them end up closing or getting sold.

Many family-operated businesses rarely get to the third generation, with most of them shutting down by the second one. There are a couple of factors that make these businesses more susceptible to failure than other companies.

Problem: Poor Financial Skills

Most second and third-generation business successors don't have the financial literacy skills that their parents and grandparents before them had. Not to mention, they don't take the time to expand their knowledge of current industry trends, relying instead on age-old methods that are bound to fail.

Many heirs are also born into wealth, unlike their parents and grandparents who clawed and climbed their way to success. Born with a silver spoon in the mouth, some of these next-gen heirs could make decisions that are detrimental to the business. Their lack of stewardship, family values, and history might also be a huge contributor to these family-operated businesses' failure.

Solution

Start engaging members of the family in the business from an early age. This way, the ones with a strong interest will be excited to get an education that will support goals for business growth. Encourage them to take courses that will build their financial literacy and business management skills to handle company affairs when they're old enough.

Another great tip that can help is to teach them to be responsible for any money they earn and avoid going into debt. If they have positive financial habits with their own money, they'll be more likely to transfer those over to their business management.

Problem: No Future Plans

Deciding on succession primarily outlines which member of the family will take up each role in the company when it becomes vacant. This issue makes up a large percentage of the conflicts family-owned businesses face, eventually lead to their closure. According to a survey carried out by PricewaterhouseCoopers, out of a sample of FOBs, only half had a succession plan in place, and out of those, only half had picked a specific person to take over in case of succession.

These statistics point to a significant lack of planning While the fear of placing the reins in the hands of someone new is absolutely understandable, the fate of an entire business shouldn't rest on this one issue.

Solution

Resisting change and focusing only on the present creates a gap. Make sure you place value on this crucial aspect of your business and think ahead.

You'll want to get together with the current administration of the company to pick a suitable person who can take over the leadership of the business and start grooming them early on. Create an open system where family members who express an interest in taking over the business can apply to and be prepared for an interview process that's open, free, and fair.

Problem: Lack of Leadership

Anyone can have the title of a leader, but if they don't know how to take charge, there won't be any leadership going on. A visionary leader can steer the business with the future in mind. Many people confuse management with leadership, but these are two very different roles. Every family business needs someone who has the wisdom to steer the firm through market lows and unexpected expenses while planning for growth.

Since most family-operated businesses will always want a family member in the lead, this could open the business up to poor leadership. This is because not every business owner is a good leader. A good leader should be able to employ the correct leadership styles in good times and in challenging times without creating a toxic environment.

Solution

It's usually pretty easy to identify a leader. But if you see a clear lack of leadership skills among your family members, consider inviting a professional to come in and provide training. Leadership skills can be taught, so you can also consider looking for family members who express an interest in these courses.

In reality, a family business doesn't have to have an actual family member in a leadership position. Once you establish and maintain the family's stake and ownership, it's perfectly fine to allow someone more experienced to run the business. Most successful multi-generational businesses will bring in outside help.

Don't think of it like you're losing control -- you're just gaining a new member of the family.

Problem: Nepotism

Many family businesses will constantly promote a family member into leadership positions over other employees, regardless of whether or not they're actually qualified. You're just being loyal, right? Wrong.

This culture of nepotism is another reason why family-run companies fail. While the thought behind this might be noble, you're not thinking about what's best for your business in the long-run. And a healthy family business that will last for generations is much better than making Aunt Karen happy now.

Solution

When you're making hiring and promotion decisions, try removing names from applications and resumes. Focus only on skills and technical abilities can help the company develop. Invite a friend or business connection to sit in on any interviews and discussions to offer a non-biased opinion.

It's All in the Family

To keep your family's company from falling into the typical traps, remember to think about the security of the business above family-centered disagreement and conflicts.

If your business is treated as an entity that's separate from your family, it'll be easier to make decisions without adding emotions to the mix. Most third-generation companies still running successfully can do so because they've learned to set boundaries to keep their work and family life separate.