Common-mistakes-in-family-owned-businesses

Family-owned businesses account for 70 per cent of Australian organisations and 55 per cent of private sector employment. 

But there’s a lot of churn: half of those businesses are younger than 25 years old — and while 41% of owners want to pass their family business onto the next generation, only 30 per cent of family-run businesses survive from the first generation to the next.

Family-owned businesses comprise a lot of our client base. We regularly work with small and medium privately owned enterprises to help them avoid the common challenges they face.

This article sets out five of these mistakes along with practical suggestions for how your business can address them to build a sustainable, intergenerational business success story.

Mistake #1:  No succession plan

Just 20 per cent of Australian family-owned businesses have a succession plan in place. 

Without a succession plan, there’s no set path for new leadership. Poor succession communication leaves the next generation unsure of how to move the business forward. This is especially notable in the event of the sudden death of a founding family-business leader. One study found that the death of a founding entrepreneur can cause a 60% loss in sales and job cuts of approximately 17%.

A documented succession plan future-proofs your family-run business. We’ve written about succession-planning in more detail here.

Mistake #2: Inexperienced family members in leadership

Allowing family members to take up management roles before they are ready can be detrimental. As discussed in Harvard Business Review, their lack of experience in leadership roles prior to joining the family business can increase the chances of family business failure.

New generations must learn every aspect of the business. Akubra hats, a fifth-generation Australian family business, requires family members to work at each point of the manufacturing process for up to two years before they can move to the office and begin to understand the management aspects. 

For non-family members working in the business, tension can arise if they feel an under-qualified person is placed in a position of leadership solely based on family ties. Other employees and leaders may leave the business if second-generation family leadership is underqualified and inexperienced. 

Giving the next generation a mentor in the business who isn’t a family member can be helpful in this regard. By learning the business from an outside perspective, future family-member leaders can integrate into the current structure of the business and work alongside all employees, not just family members.

Mistake #3: Lack of innovation 

When family-owned businesses keep leadership strictly in the family it can mean limited exposure to innovative ideas from other industries and companies. A particular weakness occurs when many generations of families tend to specialise in the same aspects of business, such as finance or marketing. Having family members experience other industries and jobs prior to joining the family business provides a competitive advantage. Rossi Boots, a successful Australian multi-generational family business, has a policy of encouraging family members to work outside of the family business first. The new knowledge and innovative ideas from other sectors develops cross-functional expertise and brings new ideas into senior leadership positions in the family business over time.

Mistake #4: Minimal leadership diversity

Drawing senior leadership positions solely from the family has created a lack of diversity in Australian family-owned businesses. Only 11 per cent of Australian family-owned business owners are female, with just 7% of daughters actively involved in the business compared to 35% of sons.

According to KPMG Australia and the University of Adelaide’s  Family Business Report 2021, leadership diversity helps to create new opportunities, foster innovation, generates a dynamic workplace culture and equates to an overall competitive advantage.

Mistake #5: No family constitution 

To paraphrase Tolstoy’s famous line, All happy family-owned businesses are alike; each unhappy family-owned business is unhappy in its own way.

A family constitution is effectively a code of conduct governing how your business and family can grow alongside one another. 

Documenting a family constitution can create smooth leadership transitions and vital pathways for effective communication. Your family business constitution should include:

  • Business vision and mission
  • Family values, beliefs, and goals
  • Clear ownership structures
  • Communication processes and channels
  • Process for family members entering and exiting your business

The constitution governs both the business and the family. It considers the different personalities interacting within those structures and can assist in the smooth running of your family business.

Developing a family constitution is not necessarily easy or fast, and you may need outside help to navigate a path to consensus. 

Concerned about making the same mistakes? 

If you’re a family-owned business entrepreneur thinking about the sorts of issues and common mistakes we’ve outlined in this article, you’re not alone. 

We assist many privately owned businesses with succession planning and associated strategies that can help to future-proof your hard-earned legacy — and your next generation’s continued success. 

 

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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