Family-run businesses make up the majority of the American business landscape. According to Cornell University’s Smith Family Business Initiative, 77% of small businesses are formed with significant family involvement. And with over half of the nation’s GDP generated from family businesses, ensuring their success is critical.
So what is one reason why family businesses fail? How can this failure be avoided?
To help entrepreneurial families solve everyday business struggles, we asked business leaders and professionals with first-hand experience this question for their best advice. From hiring objective leadership to establishing healthy boundaries, several suggestions may help you establish your family business as a thriving enterprise for years to come.
Here are 11 reasons why family businesses fail and ways to overcome these obstacles:
- Hire Objective Leadership
- Keep Family Ties Out of Operations
- Outsource for Expertise
- Formalize Leadership Roles
- Plan Business Successors
- Talk to Each Other
- Avoid Nepotism at All Costs
- Consider Ways to Expand Resources
- Clearly Define Responsibilities
- Separate Business Finances
- Establish Healthy Boundaries
Hire Objective Leadership
Family businesses tend to fail when certain individuals either don’t pull their weight or aren’t held to the same standards as other employees. It is important to realize that although these people are your family, they are also your company’s employees! If you feel like you can’t properly manage your family members, consider hiring an unbiased (and unrelated) individual to run the HR department. This way, they can neutralize any family drama that may be brought into the office.
- Carey Wilbur, Charter Capital
Keep Family Ties Out of Operations
Mixing business with pleasure can be an extremely slippery slope because business is centered around tangibles like revenue, whereas the company of family is about love and support. Combining the structures of both can be a messy transition because sentiments are involved. Avoid this by finding the right time and place for involving the family ties in the business. For branding purposes and legacy building, the familial unit makes sense. But for the logistical side of the business, you must move the way you would with non-relatives in order to not blur the lines and cause internal friction that is debilitating for scaling and growth.
- Benjamin Smith, DISCO
Outsource for Expertise
One of the greatest difficulties that family businesses face is that they just cannot keep up with their marketing tactics compared to other larger businesses. Small businesses need to search for cost-efficient ways to maintain proper marketing campaigns. This means finding third parties to help get your products out locally or bolster your social media operations to enhance how well your business is visible. It is an uphill fight, but once you get your following down then you will see results start to fall in line.
- Chris Gadek, AdQuick
Plan Business Successors
One major reason family businesses fail is due to poor succession planning. Founders often leave the company or die without having left a proper succession plan in place. The lack of a proper succession plan results in family conflict, poor leadership decisions, and loss of direction, which inevitably lead to the collapse of the business. A proper succession plan entails naming the person to take over once the current head steps down or passes away. It also involves the predecessor investing time in showing the incoming leader the ropes, properly managing the company, and discussing the leader's vision and future direction.
- Carol Tompkins, AccountsPortal
Formalize Leadership Roles
Family businesses can lack a leadership structure which can cause them to fail. One way to avoid this is by putting everything on paper. Make the leadership structure formal so that everyone knows exactly whose instructions to follow on a daily basis. Consider bringing in professional management from outside of the family while instituting changes in leadership. That way the business will be protected.
- Jordan Smyth, Gleamin
Talk to Each Other
Family businesses often fail when there is a conflict among family members or a lack of communication. I am in business with my father, and we have a small, family-owned business. When you can work with your family members and communicate well and respect each other, your business can thrive, and so can your relationship with your family members.
- Ben Cook, Jr., Printed Kicks
Avoid Nepotism at All Costs
Having a family business myself, I am conscious of the pitfalls many companies can be susceptible to if they don’t establish boundaries and parameters to create a healthy relationship both at work and at home. Family businesses can sometimes also be nepotistic, placing loved ones ahead of better performers. This can be a disservice to the company and can backfire with detrimental results. Running a business takes objectivity, and although a passionate endeavor, it requires fewer emotions and more cognition. It's vital to set the tone and create a foundation where both working and social/familial relationships can serve the utmost good.
- Katie Lyon, Allegiance Flag Supply
Consider Ways to Expand Resources
One reason family businesses fail is that there is a smaller reach for the distribution of resources. For example, in a "mom and pop" shop, both of the owners may have similar obligations outside of the business, and so their main resource (time) is limited inside of it. Similarly, if the business has financial pressures, then the family likely only has its own resources to draw from. If the owners are less connected, then they may be able to secure funding from a greater variety of sources.
- Melissa Kelly, Virtual Team Building
Clearly Define Responsibilities
Running a business with family is one of the most difficult ventures that someone can take on because it takes business and makes it personal. It's easy for people's egos, ideas, and personalities to clash. Of course, you'll have that dynamic in any business, but when family relationships are involved, things can get much more volatile. Make sure everyone's roles are clearly defined to decrease any chance of conflict and avoid any toe-crushing.
- Jessica Wise, HelpSquad
Separate Business Finances
There is an expression, "rob Peter to pay Paul." This is the reason family businesses fail: A family member takes from the family's personal finances and uses the money to pay the business's bills. Then, the family member doesn't replace the money in the personal account. This causes disagreements and both personal and professional financial stress. This is easily avoided. Make sure you keep your personal and professional funds separate.
- Janice Wald, Mostly Blogging Academy
Establish Healthy Boundaries
Family businesses fail due to a lack of boundaries. When you are dealing with family, you have less anonymity than in other business relationships, and this can lead to undue pressure or a lack of open communication. Unlike other business relationships, the family tie will still exist even if you end the business, which makes walking away from a venture much harder. Prevent this by staking clear boundaries from the onset. These can be broad boundaries, like having an exit strategy, or more day-to-day functions, like the style and amount of communication necessary in the course of a day. Be clear about your boundaries and be willing to negotiate. But when you agree on firm boundaries, stick to them!
- Hosea Chang, Hayden Girls