Family Businesses Risk Less, Lose More on Investments

Formalized Strategic Planning and Outside Advice may be Necessary to Grow Your Family Business.

While entrepreneurial business is naturally risk-prone, not all businesses face risk equally. According to a new study in Family Business Review, small- and medium-sized family-run businesses are less likely to take business risks than other, equally-sized entrepreneurial businesses, and face greater negative outcomes when they do.

"Typically, entrepreneurial businesses see measured risk-taking as a necessary part of business," says study author Mattias Nordqvist, "and some studies have shown a positive correlation between risk and reward." However, many family businesses do not follow this pattern, risking less and often suffering when they do take risks. Nordqvist believes that this may be because fewer family-run businesses seek and accept outside financial advice.

"By nature, family businesses are about family. Owners do not want to risk their children's livelihood, but they often choose to seek the advice of family members instead of outside experts," says Nordqvist. "In addition, family businesses tend to be more informal, with fewer financial controls, advisory boards or less strategic planning than other businesses." While these characteristics make it harder to take calculated risks, they do provide family businesses with an advantage: more intuitive decision-making and more flexibility.

The key, says Nordqvist, is finding a balance focused on the special needs of family businesses. To succeed in entrepreneurial risk-taking, they need to capitalize on their internal strengths, but learn from more formalized businesses by enlisting outside help as needed.

This study is published in Family Business Review.