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The Frequently Fatal Family Business Flaw: Denial

February 25, 2014
URL: http://www.entrepreneur.com/article/231757

From the family-run retailer Wal-Mart to the neighborhood mom-and-pop corner store, the family-owned business (FOB) is a vital part of the American economic landscape, providing a living to more than 60 percent of the U.S. workforce and accounting for 90 percent of all businesses in North America.

Ironically, though, families often fail at properly managing the business for scalability and longevity. Just this month, the National Bureau of Economic Research found in a study of management practices in about 10,000 firms globally that family-owned businesses have the worst management of any other type of business except for founder-owned companies where the founder CEO is still in place.

Looking deeper, research also shows that 88 percent percent of current FOBs think their family will still be running the business in five years. Only 30 percent of these businesses survive into the second generation and an alarming 12 percent make it to the third. If you were wondering about the fourth generation, that statistic is even bleaker at 3 percent.  

Related: 4 Ways to Manage Working Relationships With Toxic Family Members

Why do FOBs have the worst management practices out of almost all business types?  The answer is plainly denial. The problem is, more than any group of small- or mid-size enterprises, it’s FOBs that are most likely to be in denial about the true stress and threats on their companies and the resulting potential for business failure.

Denial is a touchy subject, but when running a business -- especially a family business -- it has to be part of the conscious id and ego. Denial is an age-old, insidious enemy that history has shown can often turn fatal for a FOB when:

The family patriarch or oldest member of the family is always deferred to as the smartest person in the room. This can discourage other employees from flagging and addressing potential problems. Within this context, bringing up concerns about something such as insufficient capital, antiquated infrastructure or excessive perks can come across as alarmist if the family patriarch hasn't decided that any of these might be an issue.  

FOBs don’t watch long-term cash flow closely enough. “Cash flow” is one of the most widely used terms in business -- it’s also one of the most poorly understood. Cash flow is frequently wrongly thought of as revenue minus expenses. Booking profit, or a strong balance sheet or income statement isn’t a gauge for current or future cash flow. It’s important for FOBs to remember that sales are not cash. Because of the more personalized nature of family businesses, the inherent inclination is to let customers pay at a more leisurely pace. But to protect themselves in difficult markets, FOBs need to let go of the fear of seeming pushy and be tireless in making collections.  

Related: Why Friends And Family Are Your Worst Business Enemies

Many FOBs don’t acknowledge the real financial state of the company. Family members naturally feel a genuine kinship toward their business, prizing the company as the manifestation of the entrepreneurial spirit of the family. While this is understandable, it can stop a faltering FOB from taking a hard, objective view of its true financial health -- now and in the future.  

Harmony within the family is often given higher priority than sound business judgment. Here is where family dynamics and history loom the largest and denial can prove the most powerful antagonist. What’s best from a family perspective isn’t necessarily what’s best from a business perspective, but ensuring a FOB is realistically identifying all the challenges and threats externally and internally has to be given priority. It isn’t easy, but honest family discussions about how to defend the business can combat this dreaded disease found so often in FOBs.

Though statistics are not on the side of family-owned businesses, these entrepreneurs can change their destiny by forecasting threats to their business and industry, which will lead to strategies to reduce the impact of potential volatility.

To get started, realistically identify all the threats and challenges both externally and internally facing your business. Then discuss with your family how to defend your business against those circumstances. Through these conversations, you’ll identify new ways of doing business that will mitigate risk and set you on a sustainable path for business growth.

Related: How My Family Helped Me Build a 'Power' Research Firm