WHY DO FAMILY-OWNED BUSINESSES FAIL, AND SO WHAT ??

Executive Summary

Family-owned businesses (FOBs) have a significant presence in the business world, with a considerable impact on economies, particularly in Western Australia. However, these businesses face unique challenges that can lead to decline and failure. This article explores the causes of decline and failure in FOBs, with a focus on the Western Australian environment. It also provides recommendations to help FOBs navigate these challenges and ensure their continued success.

Introduction

The Western Australian business landscape has witnessed significant changes in recent years, making it crucial for small-to-medium business (SMB) owners and managers to assess their business's health, and outlook. FOBs are a dominant force in the business world, accounting for a substantial portion of privately-owned businesses in Australia. To understand why FOBs fail and what can be done to prevent it, it's essential to distinguish between the causes and symptoms of decline and crisis.

The Alarming Statistics

Around 50% of all FOBs fail within their first five years of establishment, which means that about 15% of privately-owned businesses fail each year, only to be replaced by new startups. This statistic underscores the challenges and vulnerabilities FOBs face, particularly in an evolving business environment.

Unique Challenges for Family-Owned Businesses

While FOBs are a vital part of the business world, they encounter distinct challenges that can lead to decline and failure:

1.??? Death of the Founder: A significant percentage of FOB failures are triggered by the death of the business founder. Many founders delay the process of handing over the reins, leaving the family and business in turmoil upon their demise.

2.??? Family Conflicts: Family dynamics and conflicts often intermingle with business operations. In FOBs, family relationships can become complicated, leading to issues like incompetent family members in key positions, tensions between generations, marital conflicts, and an autocratic leadership style.

3.??? Intermingling of Finances: Two-thirds of FOBs mix family and business finances, making it difficult to differentiate between the two. This practice can lead to inaccurate measurement and monitoring of financial performance, posing a significant risk to the family and business.

4.??? Scarce Financial Resources: Many FOBs have limited financial resources and lines of credit. These businesses are often self-funded, with owners tapping into family assets and home mortgages. A declining business environment can strain these limited financial resources, causing significant financial distress.

5.??? Reluctance to Seek Outside Help: Some FOB owners and managers are hesitant to seek external assistance, often driven by a desire for autonomy and a reluctance to admit that help is needed.

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Recommendations for FOBs to Thrive

1.??? Plan for Succession: Succession planning is vital to ensure a smooth transition of leadership and decision-making. Start this process early to avoid crises.

2.??? Separate Family and Business Finances: Create clear distinctions between family and business finances to improve transparency and prevent financial risks from affecting both.

3.??? Manage Family Conflicts: Address family conflicts and dynamics proactively. Consider bringing in external advisors or mediators to help navigate complex family relationships.

4.??? Diversify Funding Sources: Relying solely on personal funding and bank debt can be risky. Explore alternative funding options, including equity investment, and consult with experts for guidance.

5.??? Embrace Outside Expertise: Don't hesitate to seek external advice and guidance when your FOB faces decline or crisis. A qualified advisor can provide valuable insights and strategies for recovery.

6.??? Continuously Monitor Financial Performance: Implement a robust financial management system to regularly measure and monitor key performance indicators. This enables you to make informed decisions and adapt to changing business environments.

7.??? Strengthen Leadership: Recognize that leadership and management are distinct roles. Invest in leadership development and adapt your leadership style to the specific challenges your FOB faces.

In conclusion, the challenges that FOBs face are real, and the statistics on their failure rates are alarming. However, with a proactive approach and the willingness to seek external expertise when needed, FOBs can overcome these challenges and continue to thrive. By addressing family conflicts, ensuring transparency in finances, and planning for succession, FOBs can set themselves on a path to sustained success.

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DOUG VERLEY

Business & Life Coach, Business Advisor & Strategist

[email protected]

0405 122 345

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