Reasons For the High Family Business Failure Rate

Dunlap Law Insights

If you run a family business, you may be well aware of the dire failure rate. Even if you keep the company strong while it is under your control, the reality is that most family businesses fail as they move on to the second or third generation. It’s just too hard to sustain. The vast majority end up folding.

This is an issue that impacts both your business decisions and your estate planning. You may want to pass that company on to your kids, hoping to beat the odds, but it’s tough. What can you do to give them a chance? Among other things, you want to start by looking at the reasons that the failure rate is so high.

Too many people rely on it

The first reason is that too many people rely on the company. Families grow quickly. While you’re in charge, the company just has to support you. As you pass it on, do you split it between three or four children? Do they have spouses who want to be involved? What about the grandchildren? Do you have a business partner with his or her own heirs? This spreads the company out, and it can happen far faster than the company can realistically grow.

The kids see the company as Plan B

For you, the company has always been Plan A. You put everything into it: time, money, resources, energy, emotions. For your children, though, they see it more as something they can do if their own plans do not work out. A child wants to become an artist or a business owner, for instance, but knows that they will always have a job at the company if they want it. This mindset means they don’t put as much into it as you did, which can hurt the company if they take over.

The children have skills that are too specific

Finally, some companies fail because the children who take over do not have the wide range of skills they need. Maybe you have an heir who went to school for accounting, for instance. They may be brilliant with books and numbers, but they lack the people skills that you have. They don’t know how to make sales or manage workers. It’s not that specialized skills aren’t useful, but it can create a problem when you put that person in charge of everything just because they are your heir.

Succession planning options

As you can see, succession planning comes with a lot of questions and there is a lot at stake. Make sure you understand what options you have in Minnesota and what you can do to set both your family and your company up for the most possible success.