Family Business Failures

During my journey to obtain my Doctorate at DePaul University and while shaping my dissertation on the life cycles of family business, I thought it would be helpful to share some interesting information that I come across. All the information I share will be information I wish I knew or misconceptions I had as the CEO of a family business.

In a study titled Attributions for Family Business Failure: The Heir's Perspective(1). The authors surveyed 749 heirs of businesses that failed between generation one and generation two. The study had 92.9% of businesses with greater than 50 employees and 90% of the businesses noted they were experiencing growth greater than 5%.

As I began to read this study I expected to see succession planning or product life cycles being the primary reasons for failure. However, on a scale of 1-10 this is what the respondents noted, 10 being a primary influencer for business failure.

Top 3 factors provided:

The founder did not have an adequate estate plan in place - 9.64

The founder did not adequately prepare for the transfer of the business - 9.49

They needed to raise funds to pay estate taxes - 9.38

Other factors of note:

Conflicts between family members within the business - 6.88

Not properly prepared for taking over the business - 4.92

Competition for the products of the business was intensifying - 2.11

When this study was conducted in 1996 the estate tax exemptions were significantly lower, however I think the take away from the study is still relevant for most family businesses: get your financial house in order; create competent succession; and be proactive in family matters.

If you are a family business that would like assistance navigating the tumultuous waters of family business management, please feel free to reach out at [email protected] for a risk free consultation.

(1) File, K.M., & Prince, R.A. 1996.? Attributions for family business failure:? The heir’s perspective.? Family Business Review, vol. 9, no 2, p. 171-184.