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You have probably heard it mentioned before that family-owned businesses have a 70% chance of failing before the time comes for the second generation to take over. But don’t let these numbers fool you. All new businesses have a 66% chance of going-under in their first 10 years of existing, which means that family businesses are not at a particular disadvantage, especially if you consider that a generational shift might take several decades to come about.
Nevertheless, family businesses do fail, and it is up to their owners to take the appropriate measures to reduce the odds of this happening. In the following guide, we will present an overview of 4 of the most common reasons that lead to family businesses closing their doors, as well as a number of suggestions on how these problems can be remedied.
Lack of a Succession Plan
One of the things that makes starting a family business attractive, is the possibility of cumulatively increasing the family fortune over several generations. This gives younger generations a solid foundation to build on, therefore cutting out various middlemen, such as investors or banks, from the equation.
The downside to this business approach is the fact that it can easily fall apart due to unforeseen circumstances, such as the death of a family member. Events such as these can throw a business into disarray, sending family members scrambling to restructure the company on short notice.
While there is no way to predict the future, there are some steps that can be taken to lessen the impact of these events and establishing a clear line of succession is one of them. Knowing beforehand how business responsibilities are divided in an event of a shuffle, will go a long way towards reducing the disarray that inevitably occurs on occasions such as these.
Family Feuds
The idea of a perfectly harmonized, conflict-free family is a myth propagated by various modern ideologies. The reality is a family is the site of various kinds of struggles – for power, for control, for affection. From time to time, these rivalries escalate to the point of open conflict, which can have a devastating effect on a family business. Fighting each other is the antithesis of what a business is about – people working together for the sake of accomplishing a common goal.
So in order to run a successful family business, measures have to be taken to keep interpersonal conflict at a manageable level. One way to accomplish this is by establishing a clear legal framework to keep problematic behaviour in check. A reliable family solicitor is often invaluable for setting up rules that all family members involved in the business ought to follow.
Nepotism
Healthy businesses grow over time, and this expansion usually requires the inclusion of non-family members as staff members to keep up with the additional workload. The problem arises when opportunities for career advancement are dependent upon one’s status as a family member.
If certain jobs, pay-grades, or ownership arrangements are reserved for the inner circle of the family, outsiders will quickly become alienated and dissatisfied, prompting them to seek other employment opportunities.
To counteract this tendency towards nepotism, family-owned businesses should make sure that the standards for advancement within the company are based strictly on merit. This will give non-family members the assurance that their hard work will pay off down the line, while simultaneously prompting family members to rely less on their interpersonal bonds for career advancement.
Mismanaging Finance
The pursuit of greater financial stability is one of the reasons why families become involved in business in the first place. However, sharing a purse between family members is often done informally, which is the antithesis of how a business ought to manage its finances.
Wilfully 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.
These issues can be addressed by maintaining a distance between financial and family matters, either through constant vigilance for potential conflicts of interest, or by hiring outside professionals.
Running a family business can be a rewarding and profitable venture thanks to in-built advantages such as higher workplace morale, easier 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. Hopefully our guide gave you some clues on how to accomplish this.
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