Ask SCORE: Why do some family-run businesses fail?

Published 8:42 pm Friday, August 6, 2021

Ask SCORE by Dean Swanson

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.

Dean Swanson

Unfortunately, some of these businesses don’t make it. 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 firsthand 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. The answers were posted recently in a blog on the SCORE website. Here are some of the responses from business leaders across the nation.

• 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 into 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 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. — 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. — 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. — 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

• 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. — Janice Wald, Mostly Blogging Academy

Dean Swanson is a volunteer-certified SCORE mentor and former SCORE chapter chair, district director and regional vice president for the northwest region.