Breaking the cycle of family business failure

What does it take to build a successful multigenerational family business? Many of the world's most enduring companies are family businesses. Coopers Brewery, Walmart, Samsung, and BMW all have a controlling family dynasty at their centre.

But these successful family firms are a rarity; most family firms fail to survive multiple generations. The statistics are grim: only 30 per cent of family businesses survive the transition from first to second generation. Just 12 per cent reach the third generation. Why do so many successful family businesses fail after the founding generation?

In my years of experience as a family business adviser, I have seen generational transitions fail for many business and family reasons, and I've seen several common threads connecting many failures.

One major reason is a lack of financial education for children born into wealth. Heirs that are ill-prepared to manage money make poor decisions and squander their fortune. Perhaps the most famous example of dissipated wealth is that of the Vanderbilts, once one of the wealthiest families of the Gilded Age.

During the mid-1800s, Cornelius Vanderbilt built the family's fortune on railroads and shipping. At its height, his fortune totalled over $240 billion in today's dollars, making him one of the wealthiest businessmen in history.  While Cornelius was a self-made man, his descendants lived extravagantly, with little concern for preserving the family fortune. By the 1970s, there wasn't a single Vanderbilt millionaire left.

The Vanderbilts had also fallen prey to another common problem: the dispersion of wealth and control among many children, in-laws, and other relatives. This left the dynasty with too many decision-makers and not enough concentration of power to push through important decisions.

Many families fail to nurture a sense of responsibility, history, and family values in the following generations, neglecting what we call the spiritual and family capital of the family business. Great wealth is a privilege and without a sense of stewardship and obligation, many rich descendants fall prey to ennui and boredom, failing to safeguard the family wealth or treat the business with respect.

Many problems also happen at the intersection of family and business. One key issue that many fail to overcome is a culture of nepotism, which promotes unqualified relatives into positions of power simply because they are members of the founding family. Another issue is a lack of formal governance structures and succession plans that leave the business open to power struggles, family discord, and transition problems.

A cautionary tale in this vein is that of the Anheuser-Busch company, which had been successfully run by five generations of the Busch family until it was bought in 2008 by InBev in a hostile takeover.

The final years of the Busch family's tenure were marked by family conflicts, power struggles, and financial mismanagement, dooming a 150-year-old company that had survived prohibitioners, world wars, and global competition.

If you are the head of a successful family business, what can you do to ensure that your dynasty survives into the third, fourth, and fifth generations? A great deal.

In my opinion, the most critical lesson is to take good care of the family side of the business and develop a long-term plan for your family's future.

• Educate the next generations about wealth and responsible financial management as early as possible. Too many wealthy parents fail to teach their children how to responsibly manage their inheritance. Protect the family wealth by insisting on premarital agreements and separation of personal and family property.
• Cultivate a family culture around your family's history and shared values. One way that many successful multigenerational families nurture a family legacy is by developing shared philanthropic ventures that help instil respect for family wealth and its future potential. Don't make working in the business a requirement in the family; allow each member to find their own way in the world, within or without the business.
• Protect the business' future by instituting formal governance and ownership structures that separate family control from the daily management of the business. These arrangements will make it easier for the firm to raise capital, bring in outside investors, and eventually navigate generational transitions.
• Professionalise the business by establishing employment standards for both family and non-family employees. Consider bringing in professional managers to run the business while retaining ownership stakes for your family. Most successful multigenerational family firms are largely run by professional non-family executives while members of the family focus on diversifying and managing their wealth.
• Begin planning for the eventual succession of your business. Whether you intend to train up an internal successor or bring in outside managers, proper succession planning takes years. Too many business leaders leave planning too late and put the business at risk of a sudden, unplanned transition.  

Family discord, power struggles, spendthrift grandchildren, and poorly qualified managers can all doom a family business. Ultimately, success requires many factors to align as well as a healthy dose of luck. Developing a successful multigenerational family business doesn't happen overnight. It requires years of planning, careful management, and the cultivation of a family culture that prioritises stewardship and a family legacy of success.

David Harland is managing director of FINH.