Seven ways family firms can avoid failure

They account for 70%-90% of global GDP every year. Yet despite their economic weight, their failure rate is high.

Here are seven health tips to ensure family firms everywhere can survive into future generations.

1 Have a clear structure and policies

A lack of formal structures and procedures is a common weakness among family-owned firms. All too often, the lines between family, company ownership and the management of the business are blurred.

The introduction of a written family constitution that states clearly the values and vision of the family, and regulates the relationship between family members and the business, can offset potential conflicts and help with succession planning.

2 Introduce strong corporate governance

Good governance is key to the long-term sustainability of any business. The creation of a board of directors and a family board is crucial to ensure business longevity.

Firms should also consider the introduction of a shareholder’s agreement to regulate the manner in which shareholders can exercise their rights. Additionally, the appointment of an advisory board, or independent board members, can bring fresh perspectives. Effective oversight can also avoid issues such as ‘sticky baton’ syndrome – where the older generation hands over management in theory but still attempts to retain control over big decisions.

3 Effective communication is key

Poor communication can often turn minor disagreements into major conflicts. Strong communication policies can help to take the sting out of emotionally charged conversations, which can range from managing the emotions of an outgoing CEO to involving shareholders in discussions. Ideally, there should be candid performance reviews and honesty when speaking with third-party advisors (see point seven) and other stakeholders.

4 Robust financial planning is essential

Another common pitfall is a lack of discipline when using business money for personal expenses. Also, remuneration policies that tend to reward family links ahead of ability or performance can have an adverse effect on employee motivation and staff retention.

Robust financial controls also need an emphasis on budget planning and monitoring, risk control and cost management.

5 The need for a strategic vision and planning

Not surprisingly, a lack of strategic planning can limit the lifespan of any business. Advice for companies is often to plan for ‘when, not if’, to avoid being caught out by unexpected events. Family-owned companies can also be more concerned about how well the business is performing today and be reluctant to step outside their ‘comfort zone’.

6 Don’t ignore talent management

Choosing the right person to lead the company into the future is perhaps the most important decision that family businesses take during their life cycle. Entrepreneurial talent within the family should be identified and nurtured from an early age. Likewise, it is important to avoid forcing children to join the firm if they don’t want to.

7 External advice can secure success

There are often sensitive issues within family firms that can lead to conflicts and disagreements. Advice from an independent third party can help in this regard, facilitating more open discussions on emotionally charged topics, such as succession or differing views about the direction of the business. 

Other issues, such as regulatory compliance, corporate governance and financial planning, increasingly require the use of external expertise.

Conclusion: Family firms can be successful over the long-term

The overall goal for family firms is the smooth running of the company and extending its life into second and third generations, and beyond. To achieve this, it’s essential to have formal procedures in place, a long-term view and be risk aware.