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February 5, 2020

Family Business Curse

Family businesses are the subject to a unique paradox, in the one hand it is a large contributor to the economy as a whole, and on the other hand it has a low survival rate. This is shown by a study done by Family Firm Institute in 2019 that found family businesses generated 70%-90% of the annual GDP in the US. The study also found that the majority of family businesses do not survive past the 3rd generation, this phenomenon is also known as the “Third Generation Curse”. According to the Family Business Alliance (2004), around only 30% of all family-owned businesses successfully make the transition into the second generation, 12% of which will still survive into the third generation, and only 3% of all family businesses are able to make a successful transition into the fourth-generation family members and beyond.

The main reason why family businesses are not able to remain sustainable after the second or third generation, is that they do not have a strong succession plan for their next generation. According to the Family Business Survey (2016), about 43% of family business owners have no succession plan in place. The successors also need to have proper qualifications and a big commitment to grow the business in the future. Without commitment, the family business may struggle to be competitive when faced with great hurdles.

Communication between family members are important for planning and understanding family values and traditions. Open conversations about the family’s wealth, structure of the business, and the ambitions of the founders are important. The family needs to share the stories, life lessons, and hard work behind their success. Communication is crucial for bridging relationships throughout generations.

Another reason is that family members cannot make a clear boundary between the roles and responsibilities of each family member in the business and also how to treat family matters differently than business matters. The conflict between family members also can negatively impact the family business and sometimes create rivalries between siblings.

Family businesses have unique traits compared to large professionally run businesses which are owned by a diversified group of retail or institutional investors (which is the case for majority of public companies). They have their own challenges but can become very successful if they can overcome it. Despite the conditions mentioned above, family businesses are known to perform better than their non family business counterparts due to being more nimble, committed, flexible, and fast in decision making. Thus, the question remains, “what is the right strategic planning for family businesses to sustain their business whilst still holding on to the value and the culture of the founders”?

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