5 major myths about running a family business

Family-run businesses are known for a lot of things. For starters, at least in Australia, they’re the most common type of all, representing 70% of all businesses, according to Family Business Australia. They also employ approximately half of the country’s part- and full-time workforce.

Additionally, family businesses are built to last — or at least have the pieces in place to help with that. In a recent joint survey conducted by KPMG as well as Family Business Australia, 60% of owner respondents said their successor was ready to take on management duties if they needed or wanted to leave the company today.

So if all these things are true, why is it that half-truths continue to exist regarding the difficulties of mixing family with business? It’s time to set the record straight. Here, we’ll lay out a few of the biggest myths are about family-run businesses and why the perceptions are wrong.

Myth No. 1: The potential for conflict is a good reason to avoid starting a business with your family

This may be the biggest misleading statement of all regarding family-run businesses. Everyone has encountered some kind of argument with their siblings, parents or children, so the perception is this may carry over into the business and ultimately lead to its downfall.

While it is true that disagreements do happen — with financial stress being among the primary source, according to the aforementioned joint poll — it’s wholly inaccurate to say that this should dissuade family members from becoming business partners. Conflict can be a source of inspiration for how to proceed when issues arise. Conflict forces individuals to come to terms with their reality and find solutions. A positive, solution-oriented attitude is the key to conflict so problems can be overcome; the business will be all the better for it having endured the trial and learned from it.

Myth No. 2: The first generation must be financially successful for the subsequent generations to maintain or improve profitability

On the surface, it surely seems to make sense; everyone likes to get a running head start. In doing so, it provides more room for error if a particular strategy or leadership approach doesn’t pan out. But it’s wrong to say that the second or third generation depends on the outcome of the first.

As pointed out in Family Business Magazine, history has shown time and again that it was the follow-up generation — rather than the founding one — that took the company to the next level of growth. Dennis Jaffe of Wise Council Research told the periodical that in his research, “wealth creators” as he described them, were multigenerational.

Myth No. 3: Transitions in ownership frequently take place in a year

Just as it takes a lot of time and preparation to develop a business and improve its products and services, the same can be said for ownership takeover: It doesn’t happen overnight.

As the joint study discovered, more than half of respondents said they intended the transference process to take between two to four years. Over a quarter — 28% — expected the duration to be at least five years. Only 12% said it would happen inside of a year.

Installing a transition strategy may be the best way to ensure that the process goes smoothly and seamlessly.  

Myth No 4: Subsequent generations frequently assume the ownership mantel when the first generation retires because they feel obligated to do so

No one’s feelings can be denied or declared as false, but the notion that succeeding generations only stay on because they’re somehow duty bound is a sweeping generalisation. Among “future leaders,” the study found that “cost” and “desire” were the leading sources of motivation for generations taking over from the first. The report defined “cost,” in the business commitment context, as “perceptions of substantial opportunity loss and threatened loss of investments or value if they do not pursue a career in the business.” Of the four options — obligation, needs, cost and desire — obligation was the second to last choice in what most motivated respondents to take the reins from the first generation.

Myth No. 5: Family-run businesses have a half-life of three generations

This is one of the more frequently cited statistics regarding how long family businesses last. The figure thrown around has only 12% making it to the third generation. But if family-run businesses account for the majority of organisations in Australia — including small businesses — then this figure is inaccurate.

According to the most recent statistics released from the Australian Small Business and Family Enterprise Ombudsman, nearly 80% of small businesses between 5 and 19 employees survive for at least five years. The rate is 60% for those that employ 1 to 4.

There are a lot of misconceptions about family-run businesses, but one thing is undeniable: A business plan is critical. WMC Accounting can help you set one up. Contact us today to learn more.