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Reasons why family businesses fail — and how to beat the odds, find success Tips to an effective biz

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LEDYARD, Conn.—”Putting conflicted or confused people together; that's just no recipe for creating a healthy business.”

Wayne Rivers, co-founder of Family Business Institute, delivered that message earlier this year to members of the New England Tire & Service Association (NETSA) at its annual meeting in Ledyard.

That recipe? Hardly a tasty dish, it contains the biggest reasons why family businesses fail. However, Mr. Rivers also presented some building blocks that can be created to prevent those pitfalls.

There are various reasons why family businesses can be unsuccessful, including putting the “family” aspect before the “business” side, which can have dire consequences, he said.

A family business is like playing sports in high school, according to Mr. Rivers. When a team is winning, everyone is happy. When you are on a losing team, “everyone is belly-aching.”

Some people request changes or claim that they can do it better, etc. This is why it is important to make the word “business” a priority in a family business. If there is harmony in the business, Mr. Rivers said it will continue through into the family.

One of the major reasons why a business fails is because there is not a clear vision on the part of its owners/operators. This is “amazingly important, especially as you start thinking about transitioning your business from one generation to the next,” Mr. Rivers told NETSA members.

It no longer means just planning for parents to pass down a business to a child—especially when there are multiple siblings involved. Getting everyone on the same page is important because if not, it makes it much more difficult to run a business smoothly. There will be some employees agreeing with one sibling while others, perhaps, won't but rather will agree with another sibling. That's a scenario that does not facilitate the operation of a healthy business.

“It just creates all kinds of problems,” Mr. Rivers said.

One management trait that can produce failure is not being able to manage oneself, he added. There are plenty of business owners who work long hours and are always involved. The difference between having a business and having a job, he said, is that a business is sustainable.

Mr. Rivers asked the crowd how long business owners thought their companies could survive without them—A month? Six months? A year?

“So you have to work on the business; not just in the business,” he noted.

This includes how a leader works during the day. If someone is running around with “hair on fire” every day, what is that person teaching employees? he asked.

“If you don't manage yourselves very well, you can't manage other people very well,” Mr. Rivers said.

Many owners explain that this is all they have ever known. They are, as he put it, “addicted to the urgency”—on being the white knight who saves the day. Consequently, this thought process is often passed on to the next generation of ownership.

“Now we are kind of stuck on this treadmill,” he said.

“There's just no time for learning and gaining new skills.”

If a business owner thinks about what business was like 10 years ago to now and where it is heading, he or she knows it is not going to be the same. Mr. Rivers pointed out that an entrepreneur cannot apply the same management tools he/she now uses for the business 10 years from now, given the tools may already be dated if the owner(s) is not dedicating time for training.

Besides passing down the business, there are other employment changes—or lack thereof—that may be holding back a company.

One of the reasons businesses fail is because there is no system in place for getting “the right people on the bus and the wrong people off.”

Mr. Rivers recommended all business owners take some time while they are away from the office to take a good look at current employment. Write down all employees' names on a piece of paper, he suggested. In a second column, rate them 1-10 for their effectiveness, and in a third column mark yes or no if that employee is worth what he or she is being paid.

Anyone scoring six points or lower should be let go, he urged.

If a person who scores a five is let go and is replaced with a six, seven or eight, this can improve efficiency. Mr. Rivers said he once had a woman ask what to do about a great employee who, unfortunately, also “is a horrible jerk and brings down morale.”

He responded that if the person is bad for morale, he is not a good employee. This particular topic was one that Family Business Institute dealt with a lot during the so-called “Great Recession” of recent years. Previously, there were companies that prided themselves on having no employee turnover.

“That's foolish. You need to have a little turnover,” Mr. Rivers said, because an owner needs to be able to let go of “the slackers.”

A lack of clear roles and responsibilities, along with accountability, also is path to disaster. Too often, he said, the job description for everyone is “do whatever it takes.”

This is confusing for employees because they do not understand what they should—and should not—be doing. It also creates routes for redundancy and an overall confusion in the company.

“Do whatever it takes is a recipe for nothing,” Mr. Rivers said.

This thought process also leads to how many business owners end up on that treadmill of doing a lot of things they do not need to be undertaking. They should instead be looking at the industry and act as a business analyst so that the business can succeed. The failure to do so is one of the biggest reasons why family businesses fail, Mr. Rivers said.

Being able to look at industry information and be able to plan is important. Often, the unwillingness or inability to address problems due to a fear of conflict in a family business can lead to issues.

Mr. Rivers said if there are four siblings in a vote to see if the business should expand and only one votes no, almost always the company does not go through with the expansion. The other parties do not want to have conflict. However, running the business effectively is not something that can be avoided.

Creating a strategic plan and having weekly techniques in place to execute the plan is a key to success, Mr. Rivers said.

Too often, business owners may say that they had a strategic plan prepared but it didn't work. To make it work, Mr. Rivers said, there needs to be follow through. A business plan is not something that can just sit on a shelf.

Having a common vision will allow all parties in the business to be on the same page, he said. Whether or not a company decides to add additional locations, etc., it always needs to grow. A company cannot stay stagnant and continue to be successful, so a common vision can help leaders come together and decide what is the best way of moving forward.

This can even be executed when it comes to creating a transition plan. Mr. Rivers said that 95 percent of estate planning is based on ownership, such as who is going to own the building or the business itself.

“Almost no attention is given to management succession,” he said.

This means, if something were to happen to the owner of the business, and he or she knows the business should be left to the spouse and children, there is only a plan for the physical building and the paperwork rather than the personnel. There is little thought to the ins and outs that can make or break a business.

“The business is not going to be worth very much if someone isn't running it effectively,” Mr. Rivers said.

All areas of the business—self-management for the owner, people management, marketing and sales, operations, administration and family—are all important to the success of the company.

Mr. Rivers also claimed that senior management often spends a lot of time doing things other people can do. Letting go of some of these things, possibly even hiring someone part-time to handle them, can give the owner and senior managers more time to look at industry trends or invest in training and education.

Ultimately, when creating a strategic plan for a business, get everyone involved and listen to them, he advised. This includes in-laws who are working in the business.

“Don't make your in-laws outlaws,” Mr. Rivers said.

He added that other people in the business—outside of family members—have great ideas, too, and sometimes it's the fault of the owner(s) for not asking.

The key to all strategy and management techniques is to make sure they're not falling to the curb, Mr. Rivers said. They need to be executed weekly and adjusted as needed.



To reach this reporter: jkarpus@ crain.com; 330-865-6143. Twitter: @jenniferkarpus
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TB Reader Poll

Previous | Published March 18, 2019

Where can you expect to see the most growth in 2019?

Tire sales
45% (34 votes)
General automotive service
15% (11 votes)
Brakes, shocks and other undercar services
7% (5 votes)
Add-on business
15% (11 votes)
Anywhere we can get it.
19% (14 votes)
Total votes: 75
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