The Big Reasons Why Family Businesses Fail and How to Avoid Them

The Big Reasons Why Family Businesses Fail and How to Avoid Them

August 3, 2021

Why Family Businesses Fail? The majority of American businesses are owned and operated by families. 77 percent of small enterprises are founded with considerable family involvement, according to Cornell University’s Smith Family Business Initiative. With family companies accounting for more than half of the nation’s GDP, guaranteeing their success is crucial.

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So, what is one of the reasons for the failure of family businesses? What can be done to prevent this failure?

We asked business executives and professionals with first-hand experience for their best suggestions to help entrepreneurial families manage everyday business difficulties. Several suggestions, ranging from choosing objective leadership to creating healthy boundaries, may help you establish your family business as a thriving firm for years to come.

The following are some of the reasons why family businesses fail and how to overcome them:

Make a business succession plan

A lack of a leadership structure in a family business might lead to failure. Putting everything on paper is one method to avoid this. Make the leadership structure more official so that everyone understands who to listen to on a daily basis. While implementing leadership changes, consider bringing in professional management from outside the family. As a result, the company will be safe.

Formalize the roles of leadership

Poor succession planning is one of the leading causes of family company failure. Founders frequently leave companies or pass away without leaving a clear succession plan in place. The absence of a suitable succession plan leads to family strife, bad leadership decisions, and a loss of focus, all of which inevitably lead to the business’s demise. A proper succession plan includes naming the individual who will succeed the existing leader whenever he or she steps down or goes away. It also entails the outgoing leader spending time teaching the newcomer the ropes, correctly managing the organization, and discussing the newcomer’s vision and future direction.

Expertise can be outsourced

One of the most significant challenges that family businesses confront is that, in comparison to larger enterprises, they simply cannot keep up with marketing methods. Small firms must look for cost-effective strategies to keep their marketing initiatives running. This may entail enlisting the support of third parties to distribute your products locally or bolstering your social media activities to improve your company’s visibility. It’s an uphill battle, but once you get your routine down, the results will start to fall into place.

Recruit objective management

When specific individuals don’t pull their weight or aren’t held to the same standards as other employees, family firms are more likely to collapse. It’s critical to remember that, while these individuals are members of your family, they are also employees of your firm! Consider hiring an unbiased (and unrelated) individual to oversee the HR department if you believe you can’t appropriately manage your family members. This way, any family tension that may be carried into the office will be neutralized.

Keeping family ties out of operations is a good idea

Mixing business and pleasure can be a dangerous mix because business is focused on tangibles like income, whereas a family company is focused on love and support. Because sentiments are involved, combining the structures of both can be a difficult transition. Avoid this by selecting the appropriate moment and location for incorporating family ties into the business. The familial unit makes sense for branding and legacy creation. However, in order to avoid blurring the distinctions and causing internal friction that is crippling for scalability and growth, you must move as you would with non-relatives on the logistical side of the firm.

Talk to one another

When there is a conflict or a lack of communication among family members, family companies frequently fail. Your business, as well as your connection with your family members, may grow when you can work together, communicate well, and respect each other.

Nepotism should be avoided at all costs

As the owner of a family business, I am well aware of the dangers that many businesses face if they do not set clear boundaries and parameters to foster healthy relationships at work and at home. Family enterprises can be nepotistic at times, prioritizing loved ones over better performance. This can be a disservice to the firm and can have negative consequences. Running a business demands objectivity, and while it is a passionate pursuit, it necessitates fewer emotions and more thought. It’s critical to establish the tone and lay the groundwork for both professional and social/family connections to flourish.

Consider how you can increase your resources

One of the reasons why family businesses fail is that the distribution of resources is limited. For example, both proprietors may have identical duties outside of the firm, limiting their key resource (time) within it. Similarly, if the firm is experiencing financial difficulties, the family will most likely be limited to its own resources. If the owners have fewer ties, they may be able to obtain money from a wider range of sources.

Define Responsibilities Clearly

Running a business with family is one of the most challenging endeavors one can do since it personalizes the business. People’s egos, ideas, and personalities can easily conflict. Of course, every business will have that dynamic, but when family relationships are involved, things can get a lot more complicated. To reduce the risk of dispute and toe-crushing, make sure everyone’s roles are clearly defined.

Finances for the business are kept separate

A member of the family steals money from the family’s personal finances and uses it to pay the company’s bills. The family member then fails to replenish the funds in the personal account. This leads to disputes and financial hardship on both a personal and professional level. It’s simple to avoid this. Make sure your personal and professional finances are kept separate.

Set some healthy boundaries

Lack of boundaries causes family companies to collapse. You have less anonymity working with family than you have with other business partnerships, which might lead to unwarranted pressure or a lack of open communication. Unlike other business relationships, familial ties will continue to exist even if the firm is terminated, making it considerably more difficult to abandon a venture. Set clear boundaries from the start to avoid this. Broad boundaries, such as having an exit strategy, or more day-to-day functions, such as the style and volume of communication required throughout the day, are examples. Be open about your limits and willing to compromise. However, once you’ve decided on clear boundaries, stick to them!

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