Top 5 Reasons Family Businesses Fail

Family business succession experts often quote the numerous worrisome statistics related to family business failures as businesses are passed from generation to generation. According to a Harvard Business Review article, “Some 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over. Just 10% remain active, privately held companies for the third generation to lead.”

Other studies suggest even worse statistics however it’s safe to say that the majority of family businesses often don’t last from generation to generation. When you consider the large number of companies that are family businesses and the impact that a business failure can have on the family owners and the families of all the people that are gainfully employed by these companies, this is a real tragedy.

WHAT ABOUT THE FAMILY?

Digging a bit deeper into these sobering statistics, there are several companies that complete a succession from generation to generation, and technically stay in business, however the family involved falls apart and/or the company is just a shell of its former self. Is it really a successful succession of the company if the family falls apart in the process or the company is just a shell of its former self? I think that most people would consider these situations to be failures as well.

Most families indicate that their family is much more important to them than the company. In most of these cases where the company technically stayed afloat, but the family fell apart because of the process, these families have suggested that in retrospect they wish they would have sold the company to preserve the family relationships.  In the statistics quoted above, these companies might technically be included in the numbers as “successful” successions when in fact the families involved don’t feel that way.

WHAT CAUSES THE FAILURES?

What are the reasons so many of these family businesses fail and the families fall apart? Every situation is unique and there are many different factors, often even overlapping factors, that lead to these unfortunate outcomes however they generally fall into 5 main areas. All of these areas can be problems in non-family businesses however they are often more severe and destructive in family businesses due to the omnipresent accelerant of love, power, and money and the common practice of nepotism. The top 5 reasons for family and family business failures are:

1. Poor Communication – Whenever there are two or more people together for long enough, there will be conflict. According to Harvard Business Review, “A lack of trust and communication are responsible for 60% of family business failures.” In families, at some point, there will be conflict and family dynamics. How that conflict and those dynamics are handled through communication will determine if it builds trust and brings the family closer or it destroys trust and tears the family and business apart. Too often families avoid discussing the difficult or controversial topics. Avoiding the topic may give the illusion of peace in the short-term, but it always leads to bigger problems down the road.
2. Undefined or Lack of Adherence to Family Business Mission and Values – Although adherence to a common mission and values are problems for many businesses, this is often much worse for families because nepotism often creeps in and there aren’t the necessary communication skills to discuss this difficult topic of accountability to the business and family mission and values. In a family business, the mission and values of the family should take priority over the mission and values of the business. If it comes to a point where there is conflict where the mission and values of the business do not support the mission and values of the family, the family should get out of the business.
   As a Catholic or Christian, God and His mission for us should be first in our life in terms of priority. The good for our family and others should be second, and everything else, including the business, is a distant third or further in line of priority. If we have to compromise the shared mission and values of our family (and therefore our faith) for the business, we’re demonstrating that the business is the most important thing to us – more important than God and His Commandments, more important than our family, more important than others. If we’re willing to compromise the values of our faith and our family for the business, where does it stop?
   Some of the biggest scandals in business have been the result of a business leader compromising these values. Despite these same business leaders making excuses to justify the immoral and unethical behavior, the reality is that they didn’t have the fortitude and integrity to adhere to their values. If you don’t have fortitude and integrity when it gets tough, do you really have any fortitude or integrity?
   It is amazing how far people can go to justify and rationalize the most awful behavior. The deadly sins of pride, greed and envy are very powerful, especially in family businesses. The behaviors that are derived from these deadly sins are often masked by justification and rationalization that the end justifies the means. The problem is that this is just rationalizing behaviors that are clearly against the values and moral law. As is made clear in the Catechism of the Catholic Church, the end never justifies the means (CCC 1753).
3. Poor Corporate Governance – Many businesses suffer from poor corporate governance. Whether it’s the problems with a lack of the appropriate agreements (or adhering to the existing agreements), defined roles and responsibilities, performance standards, compensation, disciplinary process, oversight (like an independent board of directors), clearly defined communication and decision-making process, or nepotism seeping into any of these areas, a lack of solid corporate governance will cause significant issues in the family and business.
4. Poor or Lack of Succession Planning – Succession planning problems are present for many businesses, whether they’re a family or not, however this is much more difficult for families. The difficulties often arise as nepotism seeps in, there is pushback from family members, triangulation among family members becomes so extreme that it would make cast-members on the TV show “Survivor” cringe, and families aren’t equipped with the skills and/or courage to discuss to address it effectively. When this happens, the planning is doomed to fail.
   Common problems with succession planning are: poor selection of qualified successors, unprepared successors, successors without successful work experience outside the business, successors that lack fundamental business education, or children that don’t really want to work in the family business but they want the title, income, inheritance and financial security for their family that comes with this. These problems are often exacerbated because the family doesn’t want to seek outside help, or even if they do seek help, they don’t follow through with the recommendations because they “know their business” better, “their family is different”, it’s too expensive, or they don’t have time for it. Many businesses will focus on the easier conversations around tax planning and the necessary legal documents for transition of the business. These areas are important and necessary however they can often provide a false sense of security and become an excuse as to why the family is avoiding the more difficult, and more important, discussions and decisions about the future of the family and the business.
5. Business Plan problems (strategy, marketing, etc.) – This is not unique to family businesses. Problems with the business plan and operations can take down a business at any time. The stress from the business failure will certainly cause added stress and potential conflict for the family however the fact that it is a family business is not necessarily what drives these problems unless nepotism leads to a course of action that is ill-advised and there aren’t the communication skills or process to course correct.

DESPITE THE STATISTICS THERE IS HOPE

Is it possible to transition a company from generation to generation successfully in a way that the family and the business continue to grow and flourish? Although there are very few family businesses that are able to do this successfully, it is possible with the appropriate planning and process. The foundation, and the heart, of that planning must be the mission of your family and include the guardrails of your family values. If you’re Catholic or Christian, we try to orient our lives to always put God first. With God first in our lives, we try to live with the values and the mission in accordance with God’s Commandments. As Jesus said, we must, “love the Lord your God with all your heart, and with all your soul, and with all your mind…” and, “love your neighbor as yourself” (Matthew 22:36-40 NRSVCE). With the heart of your planning focused on loving God and loving your neighbor (which includes your family members, customers, employees, and others) as yourself, your family and your business can flourish for generations to come.

Take care and God bless. I’m praying for you. Please pray for me.

ADDITIONAL WISDOM FROM THE BIBLE

• ^“If you follow my statutes and keep my commandments and observe them faithfully, I will give you your rains in their season, and the land shall yield its produce, and the trees of the field shall yield their fruit.” – Leviticus 26:3-4 NRSVCE
• “Therefore, whoever breaks one of the least of these commandments, and teaches others to do the same, will be called least in the kingdom of heaven; but whoever does them and teaches them will be called great in the kingdom of heaven.” – Matthew 5:19 NRSVCE
• “You shall not take vengeance or bear a grudge against any of your people, but you shall love your neighbor as yourself: I am the Lord.” – Leviticus 19:18 NRSVCE
• “But those who look into the perfect law, the law of liberty, and persevere, being not hearers who forget but doers who act—they will be blessed in their doing.” – James 1:25 NRSVCE
• “Know therefore that the Lord your God is God, the faithful God who maintains covenant loyalty with those who love him and keep his commandments, to a thousand generations” – Deuteronomy 7:9 NRSVCE
• “For surely I know the plans I have for you, says the Lord, plans for your welfare and not for harm, to give you a future with hope. Then when you call upon me and come and pray to me, I will hear you. When you search for me, you will find me; if you seek me with all your heart, I will let you find me, says the Lord, and I will restore your fortunes and gather you from all the nations and all the places where I have driven you, says the Lord, and I will bring you back to the place from which I sent you into exile.” – Jeremiah 19:11-14 NRSVCE
• “Do not be deceived; God is not mocked, for you reap whatever you sow.” – Galatians 6:7 NRSVCE