Nearly 70% of family businesses fail during their second generation, and by the third generation, only 17% remain. Why do five out of every six family firms experience this fate?
The answer lies in the dark side of their relationships. Close-knit ties that bolster trust, reputation and emotional investment can also destroy a company. Business decisions affect family members, often inequitably, producing winners and losers. And family events such as divorce and remarriage can significantly impact the business, dividing assets or reorienting culture.
The success of family business inevitably comes down to the fine art of integrating and balancing the needs between ownership, family and business. Here are a few reasons why family businesses fail to take it to the next level.
Inexperienced administration is a major cause of failure and one especially relevant to family firms. Family businesses, more than other companies, staff C-suites with people chosen not for proven ability but because of their last name. The family heir advancing to take critical decisions with inadequate preparation is a cliche in the family enterprise. Family businesses, like all businesses, require knowledgeable hands at the helm. Without that, catastrophe becomes nearly inevitable.
Weak governance structure
Many families are reluctant to address governance issues because it forces them to confront the possible need for essential changes in how they manage their business. Governance structures formalise precisely who does what and how, but also provides a distinct line between family and business. Without family governance, one can easily fall victim to internal discord and ownership issues down the track.
A generational dispute can hinder the growth of the business, especially if there’s a disagreement in core values and missions. The next generation should be careful not to reject established work methods and entrepreneurial vision, just as predecessors should demonstrate flexibility in exploring new management strategies and ideas for innovation.
Poor handling of finances
The pursuit of greater financial stability is one of the reasons why families become involved in a business in the first place. However, sharing a purse between family members is often done informally, which is the antithesis of how a company ought to manage its finances.
Willfully using financial assets for non-business related expenses, disrespecting financial obligations towards clients, or neglecting to do proper accounting, are all quick ways to get faced with legal action, degrading employee morale, and in some cases even bankruptcy.
Loss of practicality over emotions
A good handover is crucial for the business, but it can also have a big impact on relationships within the family. Where several children wish to be involved, someone needs to decide who will take which role. There is always the risk that someone will feel left out.
Limited funding options
Family businesses that have sought outside funding for expansion or liquidity events might have experienced the tough road most of their peers face.
Banks, private equity firms and other traditional sources of business financing generally aren’t interested in the long time horizons and complicated family dynamics inherent in family businesses. Without sources of funding, liquidity events due to retirement or family member exits can put a severe strain on business cash flow and limit exit options.
Lackluster marketing efforts
With over 74% of family businesses reportedly not having a formal documented strategic plan, logically, how can one have a well-considered strategic marketing and sales plan? Furthermore, companies are notorious for cutting their marketing and business development budgets when times get tough, when in fact this is exactly the time that businesses should be ramping up their marketing and business development activities to secure a greater share of customer spend in a diminishing market.
Running a family business can be a rewarding and profitable venture thanks to in-built advantages such as higher workplace morale, more accessible communication, and the inheritance of financial assets. On the other hand, they have their share of problems as well, but with proper planning, most of these can be addressed. To learn how to elevate your family business and avoid all the imminent hurdles, be sure to visit us at www.smmart.co.in.