“All happy families are alike; each unhappy family is unhappy in its own way.” That’s how novelist Leo Tolstoy began “Anna Karenina.” If he had been writing about family business, he might have said that all successful family businesses are alike, while each unsuccessful family business fails in its own way. With due respect to Count Tolstoy, the reasons family businesses fail do not appear so endlessly varied. In fact, there are probably only six major reasons why family businesses fail. If these six are competently addressed, the family enterprise’s chances of success increase significantly.
Poor Business Concept
The most common and profound cause of failure is a poor business concept. Even if all other major failure causes are remedied, a business based on a poor concept is doomed. Webvan was a dot-com startup in the late 1990s that had blue-chip leaders and $800 million in venture backing. It collapsed after three years without ever turning a profit, because its concept — that consumers would order groceries online for home delivery — proved to be poor.
Most businesses with fundamentally flawed concepts don’t get nearly that far along. The fact that Webvan imploded, despite all its other advantages, reinforces the rule that a poor concept trumps everything else. With that in mind, it’s clear that rigorous testing of the basic concept, and modifying it if necessary, is essential to avoiding a family business fiasco. (Oddly enough, the Webvan founders recently rolled out another startup, Instacart, with the same concept. Time will tell whether the idea is more viable today.)
Inexperienced management is another major cause of failure, and one especially relevant to family firms. Family businesses, more than other businesses, staff C-suites with people chosen not for proven ability but because of their last name. The family heir thrust into making critical decisions with inadequate preparation is a cliche in family enterprise. So is the result of that mistake — failure. Family businesses, like all businesses, require knowledgeable hands at the helm. Without that, catastrophe becomes nearly inevitable.
Poor planning is a third common reason for family business collapse. Paradoxically, bad planning is often prompted by previous success. When a family business is doing well, no one is likely to go around looking for possible sources of trouble. The business keeps doing what has always worked, and it keeps working — until circumstances change. Then past practices prove inadequate, and once-unthinkable disaster becomes likely. Examples of previously viable concepts undone by poor planning abound, from video rental stores that failed to see and respond to Netflix to Lehman Brothers, which reacted too late to the 2008 financial meltdown and filed for bankruptcy despite having $691 billion in assets.
In the next part of this look at major reasons for family business failure, we’ll examine breakdowns caused by inadequate capital, weak financial controls and reporting and, last but far from least, the family effect.
General background on family business failure reasons: