Top 10 Reasons Why Family Businesses Fail

Introduction

Family businesses are the backbone of SMEs, and SMEs are the hub of all economies in the world. From a shallow perspective, it would appear that family businesses should be the most successful; after all, it is family. Unfortunately, this is not the case. Research indicates that family businesses fail fast and for so many reasons. In this blog post, we will explore the critical reasons why family businesses fail and examine what you must do to ensure that your family’s business survives and transcends into the next generation.

What is a family business?

A family business is a business where majority ownership and control reside with members of a single family. In practice, two or more family members are always involved in the management or operation of the business. Members of the family could be the father, mother, and children or siblings coming together to form a company of their own.

The family’s values, traditions, and relationships can play a significant role in shaping the culture, decision-making processes, and long-term goals of the business.

The Bella Brews Story: How Culture and Poor Mentorship Could Kill A Family Business

“In the heart of a bustling city stood “Bella’s Brews,” a modest café that beckoned with its warm ambience and the aroma of freshly ground coffee. It was the pride and joy of the Santini family, a shining example of success in the realm of family businesses. But beneath its inviting exterior, a web of challenges threatened its very existence.

Nonna Bella, the spirited matriarch, was the driving force behind Bella’s Brews. With a fervent passion for crafting the perfect cup of coffee and a sharp business acumen, she had built the café from the ground up. Her vision had transformed it into a beloved local institution. Yet, amidst the daily hustle of making the business flourish, Nonna Bella had little time to mentor her children in its intricacies.

As time marched on, Nonna Bella felt the weight of her years. Her once-nimble fingers struggled with the grind, and the long hours took a toll on her ageing body. Thoughts of the future of Bella’s Brews weighed heavily on her mind, and she knew it was time to pass the torch.

Her three children, Marco, Sofia, and Luca, stood as potential successors. Tradition dictated that Marco, the eldest, should inherit the family business, regardless of his skills or passion. When Nonna Bella announced her retirement and her intention to pass Bella’s Brews to Marco, there was little room for discussion.

Yet, as Marco took the reins, it became clear he lacked the depth of knowledge and dedication of Nonna Bella. His focus shifted to cutting costs rather than preserving the quality that made Bella’s Brews renowned. Regular customers noticed the decline, and whispers of discontent circulated.

Watching from the sidelines, Nonna Bella could no longer bear to witness her legacy crumbling. She called a family meeting, her voice trembling with emotion.

“My dear children,” she began, “I have made a grave mistake. I should have prepared you all, shown you the ropes, and let passion guide the way, not tradition.”

Tears welled up in her eyes as she continued, “I see now that Marco, though my eldest, is not the one who can carry Bella’s Brews into the future. Sofia, with her keen mind and marketing skills, should have been given the chance. And Luca, with his creativity and eye for detail, could have breathed new life into our menu.”

The siblings exchanged glances, a mixture of regret and determination in their eyes. They knew it wasn’t too late to save Bella’s Brews and honour their mother’s legacy.

Together, they toiled tirelessly. Sofia revamped the branding, reaching out to old customers and attracting new ones with innovative campaigns. Luca redesigned the menu, infusing it with his artistic flair and a nod to the café’s Italian roots.

And Marco, humbled by his earlier failures, learned from his siblings and became a true leader, blending his financial acumen with a newfound passion for the business.

Slowly but surely, Bella’s Brews began to flourish once again. In the end, it wasn’t a tradition that saved Bella’s Brews, but the willingness of the second generation to break free from its constraints. They had learned that succession planning, mentorship, and a genuine passion for the business were the keys to success.”.

Top 10 Reasons Why Family Businesses Fail

1. No Clear Vision: Most family businesses have no clear vision of where they are going, what they want to achieve, or how they intend to get there. In most cases, the businesses are run as mere extensions of the family and the founders see no need to inculcate standard business practices into the operation of their businesses
2. Lack of Professionalism: Failing to establish clear business practices, such as formalized processes, policies, and procedures, can hinder efficiency, productivity, and the ability to compete effectively in the market.

Without regard to whether their children possess the experience, passion, and skills to run businesses or not, many founders believe that their children can and should run their businesses, especially if they are university graduates or post-grads.  Professionalism and skills are important if any business is to succeed.

• Poor Mentorship and Communication: Many parents feel their children are either too young or inexperienced to be taught the business. Others train their kids at top universities abroad. Often, these children see their parents’ businesses as too local or unattractive and decide to follow their destinies. Again, many founders who attempt to mentor their children in their businesses are often too protective and sometimes overbearing, making the whole training exercise a bore for their young trainees.  Not providing the next generation with the necessary training, mentorship, and development opportunities to prepare them for leadership roles can result in a lack of qualified leaders, managers, and successors.

• Mixing Family and Business Relationships: When family members work together, it can be challenging to separate personal relationships from professional ones. Sometimes, an insistence that processes and policies be followed as agreed does not go down well with some family members. The inability to understand and maintain professionalism in the workplace can lead to favouritism, conflicts of interest, and difficulties in making objective business decisions.

5. Family Conflicts and Poor Communication: Disagreements among family members involved in the business can lead to disputes over decisions, strategies, and the overall direction of the company, which can harm its operations and growth. Inadequate communication within the family and with employees can result in misunderstandings, conflicting priorities, and a lack of alignment on business goals and strategies.
6.  Poor Financial Mismanagement: Mixing personal finances with business finances, lack of budgeting, overspending, or failing to plan for financial contingencies can lead to cash flow problems and financial instability. This is very common in family businesses where the children sometimes lack financial discipline required to manage the businesses adequately.
7. Key Person or Key Man Risk: Depending solely on family members for key roles without considering external talent limits the diversity of skills, perspectives, and ideas that can drive innovation and growth. Where conflicts, sickness, or death occur, the business will suffer. This is why it is important to intentionally devolve roles and responsibilities into different hands to avoid the risk of something happening to the key man
8. Resistance to Change: Differing educational backgrounds, beliefs, and experiences usually lead to resistance to change, this time at leadership levels. Being overly attached to traditional ways of doing business or unwilling to adapt to evolving market trends, customer preferences, or technological advancements can cause the business to fall behind competitors.
9. Unclear Succession Planning: Some cultures and family traditions insist that the first child must take responsibility and run the family business; this has led to the failure of many family businesses. This practice hampers selecting the family member who is best suited to run the family business and, by extension, stops the processing and implementation of a successful succession plan. Without a clear plan for passing the business on to the next generation or ensuring a smooth transition of leadership, the business can face uncertainty and instability when key leaders step down or retire.
10. Inability to Separate Emotions from Business Decisions: In situations of polygamy or where parents show favouritism and preference for one child over another, suspicion and emotional challenges will arise. Emotional attachments to the business, such as sentimental value or a desire to preserve a family legacy, can cloud judgment and prevent objective decision-making, leading to poor strategic choices.

Conclusion

The failure of family businesses can stem from a variety of factors, ranging from interpersonal conflicts and poor communication to financial mismanagement and resistance to change. Addressing these challenges requires a strategic approach that emphasizes professionalism, clear succession planning, effective communication, and a willingness to adapt to evolving market conditions. By recognizing and proactively managing these potential pitfalls, family businesses can increase their chances of long-term success, sustainability, and continuity across generations.

Are you ready to overcome the challenges facing your family business? Connect with Michael Inyang, a seasoned family business consultant at SteepleGlobal.com. Based in Uyo, Nigeria, with offices in Lagos and Calabar, Michael specializes in guiding family businesses towards success. Schedule a consultation today to build a solid foundation for your business’s future!

Schedule Your Consultation with Michael Inyang

Schedule Your Consultation with Michael Inyang