The short life of family enterprises

FAMILY-OWNED enterprises (FOE) constitute the world’s oldest and most dominant form of business organizations.

According to Prof. John Ward, in many countries, family businesses represent more than 80 percent of the overall businesses.

It is also a fact that most family businesses have a very short life span beyond their founder’s stage and that some 95 percent of the family businesses do not survive the third generation of ownership. This is often the consequence of a lack of preparation of the subsequent generations to handle the demands of a growing business and a much larger family.

Strengths of family businesses

Several studies have shown that family-owned companies outperform their non-family counterparts in terms of sales, profits, and other growth measures. This high performance is the result of the inherent strengths that family businesses have compared to their counterparts. Some of these strengths include:

Commitment. The family as the business owner shows the highest dedication in seeing its business grow, prosper, and get passed on to the next generations. As a result, many family members identify with the company and are usually willing to work harder and reinvest part of their profits into the business to allow it to grow in the long-term.

Knowledge continuity. Families in business make it a priority to pass their accumulated knowledge, experience and skills to the next generations. Many family members get immersed in their family businesses at a very young age. This increases their level of commitment and provides them with the necessary tools to run their family business.

Reliability and pride. Because family businesses have their name and reputation associated with their products and/or services, they strive to increase the quality of their output and to maintain a good relationship with their partners — customers, suppliers, employees, community, etc.

Why do family businesses still fail?

Indeed, about two-thirds to three-quarters of family businesses either collapse or are sold by the founders during their own tenure.

Only five to 15 percent continue into the third generation in the hands of the descendants of the founders.

This high rate of failure among family businesses is attributed to a multitude of reasons. Some of these reasons can be due to the state of the industry or some external event like the regulatory environment or the economy. But clearly, the real danger points to the three major issues below:

Complexity. Family businesses are usually more complex in terms of governance than their counterparts due to the addition of a new variable: the family. Adding the family emotions and issues to the business increases the complexity of issues that these businesses have to deal with. Unlike in other types of businesses, family members play different roles within their business, which can sometimes lead to a non-alignment of incentives among all family members.

Informality. The family tries to do it all and there is usually very little interest in setting clearly articulated business practices and procedures. As the family and its business grow larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the continuity of the business.

Lack of discipline. Many family business owners especially the next generation members who have never experienced struggling to survive have this sense of entitlement and often times do not pay sufficient attention to key strategic areas.

While many businesses that are owned and managed by families recognize the importance of ownership and management transition, “few know where and how to start in developing a governance and succession plan.”

For advisors out there, the key is to challenge FOEs to pursue governance and succession. Doing so will improve their odds of survival.

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