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Avoid the Traps That Can Destroy Family Businesses

February 21, 2012 by George Stalk and Henry Foley
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In This Article
  • Some 70 percent of family-owned enterprises fail or are sold before the second generation has a chance to take over.

  • Many of these failures can be traced to three common traps.

  • Recognizing and avoiding those traps can boost the odds of long-term survival.

 

Nearly 75 years ago a charismatic Brazilian entrepreneur named Enrique Rosset started an eponymous textile and apparel manufacturing company in São Paulo. Some 40 years later he and his oldest son decided to diversify by acquiring Valisere, an upscale but failing lingerie business. Over the decades, Enrique and his four sons transformed their operation into one of South America’s leading textile and apparel manufacturers. During the 1990s Grupo Rosset expanded into swimwear, with great success. But the family knew the business faced critical strategic challenges. The rise of shopping malls was weakening the small Brazilian retailers who’d made up Rosset’s primary distribution channel. Chinese imports were beginning to pose serious competition. The advent of digital fabric printing would undercut Rosset’s core manufacturing strength unless the company adopted the technology itself. Enrique’s sons, who’d led the firm for 20 years, had to make a crucial decision about which of the five members of the third generation should assume the leadership role.

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In the United States, a familiar aphorism—“Shirtsleeves to shirtsleeves in three generations”—describes the propensity of family-owned enterprises to fail by the time the founder’s grandchildren have taken charge. Variations on that phrase appear in other languages, too. The data support the saying. Some 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over. Just 10% remain active, privately held companies for the third generation to lead. In contrast to publicly owned firms, in which the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years, and these extended tenures can increase the difficulties of coping with shifts in technology, business models, and consumer behavior. Today family firms in developing markets face new threats from globalization. In many ways, leading a family-owned business has never been harder.

The high failure rates of family businesses may seem unavoidable. They’re not. In our work advising these types of companies, we see them repeatedly caught in the same traps. Recognizing and learning to avoid those traps can boost the odds of long-term survival.