The Frequently Fatal Family Business Flaw: Denial It turns out, businesses owned by families suffer from bad management practices that could cause a meltdown.

By Dan Scouler

Opinions expressed by Entrepreneur contributors are their own.


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

Wavy Line

Dan Scouler Sr. is chief executive of Scouler & Company. Prior to founding the firm, Dan held senior management positions at Ernst & Young, Deloitte & Touche, FTI Consulting and investment banks Meadowcroft Associates and Peers & Company. He has 35 years of experience in restructuring and turnaround management and has participated in the reorganization of companies such as Adelphia Communications, Chiquita Brands International, Cinnabon, General Nutrition Centers and Polaroid.

Editor's Pick

A Father Decided to Change When He Was in Prison on His Son's Birthday. Now His Nonprofit Helps Formerly Incarcerated Applicants Land 6-Figure Jobs.
A Teen Turned His Roblox Side Hustle Into a Multimillion-Dollar Company — Now He's Working With Karlie Kloss and Elton John
3 Mundane Tasks You Should Automate to Save Your Brain for the Big Stuff
The Next Time Someone Intimidates You, Here's What You Should Do
5 Ways to Manage Your Mental Health and Regulate Your Nervous System for Sustainable Success

Related Topics

Business News

After Being Told They Could Work From Home Forever, Employees Made Major Life Changes. Then, a New CEO Ordered Them Back to the Office.

Farmers Group CEO Raul Vargas is facing backlash for the change, but he says being in the office brings more "collaboration" and "innovation."

Business News

Hedge Fund Pays NYC Interns $20,000 a Month on Average, Sent to Lavish Palm Beach Kickoff

Citadel is known for its over-the-top parties and company retreats.

Business News

Pete Davidson Says He's 'Figuring It Out' After Buying a $280,000 Boat While 'Very Stoned'

The former "Saturday Night Live" star purchased a used Staten Island Ferry with Colin Jost in January 2022.

Green Entrepreneur

Blockchain Could Help Us Combat Climate Change — Here's How.

Digital carbon plays a vital role in addressing climate change.

Business News

Uber Eats Deliveries Are Flooding a Los Angeles Neighborhood — Except No One Knows Who Placed the Orders

Residents of L.A.'s Highland Park neighborhood are once again the target of dozens of unsolicited Uber Eats orders. The "annoying and somewhat disturbing" mystery is gripping the city.

Business News

'I've Got the Bug for Business': See All of Mark Wahlberg's Entrepreneurial Endeavors, From Marky Mark and the Funky Bunch to Wahlburgers

Mark Wahlberg owns businesses in several categories, including entertainment production, apparel, fitness, and nutrition.