Most family businesses fail

On Behalf of | Nov 9, 2022 | Business Litigation |

You have probably heard people say that small businesses are the backbone of America, and it is true that they are a major part of our economy. It’s also true that about 77% of the small businesses have “significant family involvement” when they are formed. In other words, a lot of our small businesses are also family businesses.

But, for as important as these businesses are, the statistics show that the majority of them will not make it to the third generation. In fact, a lot of family businesses don’t even make it on to the second generation. They fail very quickly or they get sold off when the original founder decides to retire.

But why does this happen, and what can you do to avoid it?

Family conflicts

One of the major reasons that businesses fail is that family members have a conflict. For instance, two siblings want to take the company in very different directions. They can’t find any way to compromise, and the fact that they are related only makes these discussions more volatile than they would be if they were just business partners.

Lack of ability

In some cases, the next generation just doesn’t have the ability to run the business. The founder may have been excellent at doing their job and caused the business to grow significantly over their lifetime. But the next generation may just assume that this success will continue, even though they don’t have the skills or the knowledge to do so.

Refusal to outsource

When it is clear that the heirs cannot run the business or lack certain skills that are necessary, one of the best tactics can be to outsource. The company can bring in an expert who really understands that area specifically and who can work within these areas. But many people are hesitant to do this, either because they don’t want to pay or because they don’t want someone else to make business decisions. As a result, those making these decisions are not experts and may make mistakes.

What do you do when things are going poorly?

Maybe you’re working at a family business now, as a co-owner, and you’re already worried. There are constant conflicts and the business seems to be floundering, perhaps because of your siblings. The key to success may be resolving those conflicts and disputes, so be sure you know what legal steps to take.