Conflicts in families with multiple children have remained a common yet unresolved issue in family firms. In this study, we provide a novel perspective by drawing on family system theory on how the adoption of structural separation strategy can help address the issue of conflicts in family firms. We theorize that founders with multiple children pursue a higher degree of diversification—structural separation of family business—to mitigate conflicts amongst children. We further theorize that the effect of the number of founders’ children on diversification is weaker with greater gender diversity of children, higher age gaps of children and with a profound influence of harmony culture. Our empirical analysis of Chinese listed family firms (2003–2023) provides strong support for these theoretical predictions, with the notable exception of harmony culture’s influence, which contradicts our hypothesized prediction. Our study extends the implications of family system theory by applying its assumption of structural separation strategy to family firms’ literature, advancing research on how conflicts in family firms can be mitigated through diversification and exploring family conflicts as a novel predictor of diversification in family firms.