The 3 Main Reasons Why Family Businesses Fail

The 3 Main Reasons Why Family Businesses FailThe 3 Main Reasons Why Family Businesses Fail

Will your family business survive in the hands of the next generations?

The family business is the backbone of the Asian economy. According to this report from EY, 85% of the companies in the Asia-Pacific are family businesses.

But while family businesses are prevalent in the region, these firms are struggling. According to Harvard Business Review, the normal reasons why family-owned companies fail is because of "inadequate governance, poor talent management, and absent or improper succession planning."

What can you do to prevent your family business from failing? Read on to find out how family businesses fail, and what you can do to stop that.

1. Successors are often entitled and unmotivated

The 3 Main Reasons Why Family Businesses Fail
Source: Giphy

Children often feel like they're forced into joining the family business. This creates a situation where management is uninvested in the business and even resentful of it.

Some parents don't make their kids feel obligated to join their business, but often give it as a place where they will always be welcome. Children can then treat their parents' business as a fallback — once they fail in their own ventures, they join the family business with little relevant experience.

How to avoid this trap: Promote a culture of meritocracy. It's totally understandable that you'd want the next generation to take hold of the reins, but their position in the business shouldn't be a given. It should be earned.

In this Harvard Business Review article, they cite an example of a European firm that has a stringent application process for family members:

" members applying for a job must be at least 26 years old, have earned a master’s degree in business or engineering, speak three languages, and have won two promotions within five years at a nonfamily firm. And they are given only one opportunity to apply: If they’re turned down, they must go elsewhere."

2. Family feuds can get in the way

The 3 Main Reasons Why Family Businesses Fail
Source: Giphy/Sam Maurer

Conflict is unavoidable in any company, but most especially in family businesses, when it is particularly easy to step on someone's toes. Family business expert Don Schwerzler tells Inc. that disputes within a family-owned business are harder to resolve because there are three kinds of issues at play:

  • family issues
  • business issues
  • ownership issues

How to avoid this trap: Schwerzler recommends hiring a mediator or consultant to help negotiate and come up with resolutions. Business owners should also make sure to create boundaries between family and the business.

This means not giving someone special treatment just because they're a family member. It also means knowing the difference between family and business matters. These boundaries can be easily blurred, so be mindful of what kind of culture you're creating.

3. Turning a blind eye to problems to "keep the peace"

The 3 Main Reasons Why Family Businesses Fail
Image: Giphy/Cartoon Hangover

What's best for the family isn't always what's best for the business.

One common mistake that family business owners make is making bad business choices just to "keep the peace." You shouldn't turn a blind eye to threats to your business just because it makes you uncomfortable.

How to avoid this trap: Foster honest communication within the family and the company. In this Entrepreneur article, former CEO of Scouler & Company Dan Scouler writes:

"It isn’t easy, but honest family discussions about how to defend the business can combat this dreaded disease found so often in family-owned businesses."

Featured image: Flickr/timetrax23; Shutterstock


We hope this article on what to avoid in a family business was helpful!

Here are some other articles that you might be interested in:

What I Learned From Going Into Business With My Spouse

Winnie Chan of Bynd Artisan: How I Reinvented Our Family Business And Made It My Own

Starting A Business With A Friend: Is It A Bad Idea? 6 Tips To Make It Work

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