What makes a family business successful across generations ?
Or, in cases that fail, what is the major contributor to failure ?

Several studies have been conducted in regard to longevity of family businesses – with varying, and therefore inconclusive, opinions. While some say that most do not survive the third generation, others strongly refute this and propound that family businesses are more robust and resilient as compared to established corporations.

If we look around we will find many examples of businesses that were started passionately by an individual, now flourishing under the direction of his great-grandson. Likewise, we will also find instances of those built up meticulously by an avid entrepreneur, go “south” when he has passed on.

While the contributing factors could be several, discussed here are three very likely reasons for such failure:

The inheritors of the business do not have the same degree of commitment to or vision for the business as the founders – but are keen to take its profits. A profitable, cash generating enterprise suddenly finds that there is a shortage of resources when the business is in need. Or the financial cushion which enabled it to meet hard situations (or stiff competition) has suddenly evaporated. Plans to take advantage of growth opportunities cannot be implemented as resources are either not available or have to be borrowed at additional cost. These result in the business being gradually weakened – and being on a steady downhill slope. In such situations, Management has a role to play in advising the owners appropriately. If their protests are not heeded, failure is certain.

The inheritors have a very aggressive approach to growth – and often push the enterprise beyond its capability. In the absence of any formal indoctrination into the business, the inheritors may come in with their interests and expectations which, in this rapidly changing environment, could be vastly different from those of the founding father and his team of Managers. Their direct entry in an Executive capacity – at times without the financial prudence or familiarity with the nuances of the business – could adversely impact the enterprise. The scion of the family may like a faster rate of growth. Or would like to foray into bigger markets. These need to be planned exercises, thoroughly studied for resource adequacy, competence and risk before they are ventured into. Should the inheritor not have the patience for such study, the enterprise is at risk.

Management approach to business being short sighted: When the manager’s association with the business is governed by short, two or three year contracts, he is likely to be as short-sighted in his vision of the business. This “short-sightedness” is further accentuated at the time of succession. If there is no effort on the part of the ownership to instill a long-term commitment among the Management, the latter can be expected to be short-sighted – to the detriment of the business. Family businesses that have been consistently successful across generations generally have a history of long-serving managers. Indeed, the UAE Government has instituted the Golden Visa Scheme recognising that long-term commitment has its benefits.

Successful family businesses are a varying combination of entrepreneurial drive and vision along with a responsive and responsible management. While the one brings in “drive” the other provides “control” and discipline. In these cases we are likely to find a harmonious co-existence between owner and manager, management having bought in to the values and aspirations of the ownership, and a respect for tested traditions without compromise on technological progress. This relationship – when well balanced – permits harmonious resolution of conflicts that arise with succession.

When there is a mismatch in the relationship between Entrepreneur and Manager, failure is not too far behind.

A.S.Subbaraman, a partner in Business Mentors LLC, is a management advisor and business mentor currently based in Dubai, UAE. He has over 40 years’ experience in strategic and operational management at senior levels across industries in India and the Middle-East. Refer www.biz-mentors.com for details.