70% of Family Businesses Close – 3 things to avoid!

Only 30% of Family Businesses last into the second generation. 12% Are viable into the third according to the Family Business Institute Inc. Do you want to know why?

When the founder started the business and became self-employed. He had a vision, love and passion to make the idea a business. Pretty soon this idea and passion became a company. Where family members and others come to work every day to make a living. Over time the company becomes mature and the original founder grows old. Followed by either by choice or other circumstances wants or needs to step down.

Then enters the second generation and in 70% of the cases, the family business runs into problems. Or is sold before the new generation takes over! The studies by The Family Business Institute revealed that the long tenure of the patriarch potentially results. With the firm’s difficulty to cope with shifts in technology, business models and consumer behavior.

Family business is a challenge in any language as the Chinese saying goes -“wealth never survives 3 generations”. Having worked with family businesses over a number of years. I’ve seen them caught repeatedly in the same issues.

Here are 3 of those traits that you can avoid to boost the odds of long term survival:

1. Employing family members, no matter what.

The owner of the business wants his children to work in the business no matter what. This is great if that is what they want and it is their passion. However the unspoken promise of “there’s always space for you” might lead to employment in the business as being treated as only being a last resort. The danger is that the second generation join the firm in their late 30’s and despite their lack of experience get leadership positions due to their family connections.

In my view the best practice is to ensure that the individual is properly qualified, gets real business experience and applies for open positions as any normal employee would. This is tough to implement when the next generation has a sense of entitlement, a lack of passion and perhaps “laziness”.

2. Family Growth outstrips Business Growth.

What happens when the family growth in 2nd and 3rd generation outstrips the business growth? It’s a fallacy to believe that the business can support and employ all of the offspring and more. By applying the best practice above, family businesses can avoid or at least reduce this problem.

Perhaps a better solution is to ensure that the business develops growth strategies that will grow the business and create additional work and responsibilities for “new” family employees. This could be in the same business or perhaps a new extension. Putting these growth strategies together in a proper business plan with a clear understanding of deliverables and actions, will ensure that the growth happens. A business that is growing sustainably needs more employees and provided they have skills, family can be accommodated.

3. Management must manage.

It was Harold Geneen who said in his book on management that “Management must Manage”. This is not always so easy in a family business, as family emotions can create a lot of tension in the business and even more so in the family. Making tough decisions are sometimes inevitable and the mechanism for doing this, so that the business can run as a commercial profitable enterprise must be set up.

Best practice here is to ensure that family members don’t supervise each other but this is not always practical in an SMME. One way of overcoming this is by ensuring that the family members have an unrelated mentor or business coach to provide objective input when it comes to performance evaluations, critical employee advice and someone who holds up the mirror when needed.

One of South Africa’s most iconic family businesses, Pick ‘n Pay was started by Raymond Ackerman and is hugely successful. There are many more, not as famous, but who are successful family business in their own right in our country. May they continue to prosper and grow, making the right business decisions for many generations to come!

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Have an awesome week!