The demographic reality for many family businesses is that the enterprise created and then bequeathed by generation 1 (or G1) has to continue growing to support the needs and aspirations of a larger family in G3. This makes it worth thinking about the potential obstacles to entrepreneurial growth of a family business.

Barriers to entrepreneurship

Some would argue that the biggest of these is the family itself. Instead of diversifying or investing in new ventures, the next generations become more interested in consuming the wealth generated by the existing business and in using the advantages it bestows to pursue other goals, such as social or political distinction. Being thus starved of investment, the business suffers an inevitable decline.

Another reason for failure that is often mentioned is family members being put in positions in the business that do not suit their talents, because the decisions are motivated by family sentiment rather than business sense.

Maybe another reason is that when a business has been inherited no one wants to risk losing it, so it is better to play safe and try for cautious, measured growth. The irony is that this is likely to increase the risk of a clogs-to-clogs denouement over the span of 3 generations because the needs of a growing family outstrip the capacity of their business.

Examples of success

There are certainly examples of families who seemed to conspire in bringing down once successful businesses. However, in the interests of balance it is only fair to point out that other families have achieved multi-generational entrepreneurial success.  If the family could be the source of failure, surely it must also be linked to these success stories.

For example, a family decides that they want a business that can support the next generation. Immediately, this family ambition has led to a long-term investment horizon and a growth target for their business.

They invest in developing the talents of the next generation, including backing their ideas with venture capital type investment that leads to diversification. They are not shy about taking opportunities for short-term returns, or about bearing some losses since this is part of entrepreneurial risk-taking, as long as the family’s overall growth targets are achieved.

Their strategy of long tem growth and patient capital may indeed be viewed jealously by other types of businesses that are called entrepreneurial who must generate short term returns for their less than patient investors.

It would be wrong to paint a rosy picture of family entrepreneurship, but it seems equally biased to argue that the best way to maintain an entrepreneurial business attitude is to limit the impact of the family.  The key is surely how the overlaps between the business and the family are managed.

We have identified various resources that we believe could give families an entrepreneurial edge. We also suggest, however, that the same resources have the capacity to contribute to decline of a family business.  The difference lies in how the family orchestrates their resources, because they are not innately good or bad, as others seem to think – click below to download our guide as a PDF

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