Family-run businesses are in many respects the backbone of American business. They are typically the most stable of small businesses, with a much lower failure rate than other small business models. Some of the largest and most successful companies in America are family-owned and operated businesses. Yet 70% of family-run businesses don’t make it to the second generation, and a full 90% never make it to the 3^rd generation. Not new statistics, to be sure, but appalling just the same.

So why the high failure rate? Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. While we are strong advocates of planning, we know that no plan will correct fundamental weaknesses in a business unless its managers recognize and address those weaknesses. So in this article we take a slightly different approach to defining what is needed. We’re going to go out on a limb and be specific about some of the problems we’ve seen that prevent many family owned businesses from realizing (very much of) their real potential.

Please understand, we are not saying that all family-run businesses are fundamentally flawed, because they’re not. What we’ve observed, however, is that those that do have problems are often emotionally unwilling to acknowledge them or, having acknowledged them, are unwilling to make the hard decisions necessary to fix them. While far better than the 90+ percent average failure rate of small businesses as a whole, this is still a pretty dismal record given the advantages such businesses typically have: loyalty, strong family support systems, management continuity, long training periods for the next wave of managers, love and affection, etc.

So here are the problems that we often see. If you’re the founder of a family-run business trying to groom a son or daughter to succeed you, we don’t ask you to accept our list as your own; simply consider the possibility that some of these pitfalls may apply to your company. For example:

• Your son simply may not be a very good business person. He may have blindly copied your approach over the years, without developing the ability to devise and implement his own approach to problem solving, not a good shortcoming for the boss to have. All the love in the world won’t fix this one.
• Your daughter may just have a very different management style than the one you used to build the business, and she may be successful only if she can adopt a style that works for her. Of course if you don’t trust any style but your own, that won’t seem like a very good idea.
• Your son-in-law (yes, that qualifies, too.) may recognize that your way of doing things – so successful 30 years ago – just won’t work today, with more demanding customers, more aggressive competition, Internet options at every turn, and the big box competitor just down the street. If he sees that clearly and you don’t, trouble lies ahead.
• Your daughter-in-law (oh, come on, it could happen!) may not have some of the skills needed for your type of business, yet be a very bright, alert, communicative person who commands respect. For example, a Phi Beta Kappa lawyer who steps into a company where she must be the sales manager is in trouble if her brilliance is mostly manifested at the PC keyboard or in a research library. Worse, you may refuse to see those shortcomings, preventing them from being addressed openly. Still worse, you may see them only too clearly, and use them as a verbal club to prove time and time again that no one can do it the way you did, especially her. This will invariably prove to be a self-fulfilling prophecy.

Stop by here next week for the continuation of this post, including some suggested solutions.

As always, I welcome your comments and feedback.