Family business enterprises have a unique opportunity to generate wealth and to shape the destiny of family members to a far greater extent than working in a non-family business. However many family businesses fail to reach their full potential to generate wealth.
From my experience as an independent director of four family businesses I have identified the five paramount reasons family businesses fail. I have also provided some advice on what to do about them.
Family businesses require strong relational leadership skills. In my advisory interaction with owners of both family and non-family businesses I have observed that family businesses are fundamentally different from non-family businesses due to the complexities in the interaction of the business with family dynamics.
Leading family businesses is much more complicated than leading non-family businesses. Because a family business enterprise is not only a business, but also involves a family ownership group and other family members a family business enterprise is much more complicated than non-family business organisations.
I have been consistently struck by the realisation that it is the quality of leadership which is the prime differentiator of success between family businesses.The leadership imperative is to maintain organisational focus on business results whilst proactively managing family issues impacting on business performance.
There are many reasons that family businesses fail, but five are paramount and lead to the inevitable sixth;
- a sense of entitlement of family members leading to conflicts over money,
- nepotism resulting in underperforming management and resentment of employees,
- illness and death of business leader with no agreed succession plan
- family infighting over status and succession planning,
- family disputes, marriage breakdowns and divorce, inevitably leading to
All of which result in:
6. Cash Flow Problems and Business Failure.
Development of a Family Charter can help avoid these issues which unless addressed will lead inevitably to an underperforming business and destruction of family wealth. Clarifying and documenting the family’s roles as Owner-Shareholders, Board Members, Managers, Employees and Non-employees is an essential prerequisite to help manage these issues. A critical success factor is not to confuse ownership and inheritance with management of the business.
Appointment of independent non-family directors and chairman to provide unbiased guidance to the board and perhaps establishment of a specialist professional advisory board can help guide sustainable growth of the business enterprise through generational changes in family involvement.
Establishing disciplined business planning, management and reporting processes delivers the greatest benefit. Even for small firms, the value achieved from the discipline of having formal minuted Board Meetings and separate minuted Operational Management meetings with agreed Action Plans and Accountabilities cannot be too strongly emphasised.
Board Meetings should address Investment Decisions, Employment Decisions and Succession Planning. With the CEO reporting to the Board on Operational Performance of the business.
As a guiding principal a family business enterprise should identity and adapt proven best practice business governance, business planning, and leadership and management practices of successful larger businesses to realise its full potential.
A robust business plan is a good starting point. The business plan should be aligned with the firm’s inherent strengths, mission, values and vision. The business plan will target key performance goals – revenue, cost and profit and clarify investment and people requirements.
I have found that developing the business plan with our clients in a workshop process to be very powerful in exposing and addressing family dynamics, in a non-confrontational manner, that are impacting business performance.