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Why do family businesses fail?

May 15, 2019
Why do family businesses fail?

The reasons for a failed business can come through thick and fast. In a world faced with technology change, high taxes, high employment costs and digital automation the reasons for a failed business are literally endless.

So what is the major reason a family business fails?

In our experience it is the family.

The ability of a family business to complete take away the impact of the family away from the performance of the business is virtually non-existent. In a family business family members will die. They will become divorced. Family members will over extend themselves to buy a home they cannot afford or a family member will simply get tired of working with the family.

The devastating impact of life events will impact every business and many family risks, especially for smaller family businesses, cannot be controlled or diversified (like death).

However many of the family risks can be managed better is to introduce a system of family governance. Giving the family members an opportunity to talk about conflict in a forum that is not connected to a discussion about the business operations is critical. This can be done by a general chat or a formalised meeting but a family can go over things like:

What is acceptable to discuss at work?

How to we value the business if a family member chooses to leave?

Can new family members become part of the business?

How do we pay family members?

Care should be taken not to “stamp out” the concept of family within the business. When a family chooses to work together the choice is mostly made with love behind it. And that love within a family business can be used as a competitive advantage over other large brands.

Just because Google does it does not mean that you should. Large public entities actually have a lot to learn from family businesses.

The concept of family in a family business should be professionalised. The elements of love, care, compassion, longevity and authenticity that is naturally present within most families should be retained. And the “noise” elements that some families have should also be retained – away from the eyes of outsiders.

If the family business creates a sound system of governance the impact of the family values in the business should also be considered and investigated. Most often the family within a family business retain and creates the senior leadership roles. So the values that are held true for a family and the culture within the family naturally tends to flow into the culture and values that run within a family business.

We recently did a culture workshop for a successful family in business. And one of the catchphrases used by the family in their language was “carpe diem” (seize the day). This family were very committed to extracting every ounce of value from each day and effectively living a large successful life.

The family business focussed on short term, large, lucrative contracts. The business, and the family were committed to big short term wins on an ongoing basis. And the cash-flow of the business, their break-even point and the overall business dynamics – for a business generating more than $50m a year) was predicated on the family values. In fact the family who had chosen the senior leadership team had carefully selected quality people who had a similar ethos to that of the founders.

A different family would typically use the language “look after the customer and the business will take care of itself” (from Ray Croc). The family values we uncovered were that of doing excellent work, continual re-investment back into training and deferring gratification. This could then be compared back to their business operations which demonstrated a very low dividend payout ratio and a large investment into infrastructure and service models.

At this stage it is important to note that the business culture is not wholly reliant and dominated by the family members. The attitude and operations of team members within a family business will always be valued, respected and contributed. A team member within a family business can materially impact the culture of a family business.

The development of family values and business values should go hand in hand. And the process of professionalising the family governance in a family business as well as the business governance should also go hand in hand. At Westcourt we call this a “parralell planning process”. Such a process can be managed for either the family business or the family office.

Where we see a failure in a family business is where the family element in a family business is not professional. The family element effectively dominates the operations of a family business with no goverance in place – so that were a large family life event happens then the family business is able to insulate itself from the impact.

If you want to implement quality family business governance it is important to learn from experience – not mistakes. Engaging a team of professionals with life skills in building and assisting family businesses is a crucial step forward. At Westcourt we only help family businesses. We have a depth of specialist education in how successful families govern the business, real life experience in running a family business and a sole focus on making family businesses great.



Category: Family Owned BusinessFinancialTax

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