If you’re reading this post, you’re probably familiar with the statistics: the failure rate for second generation family businesses is very, very high. When you consider the fact that family businesses make up about 60% of the gross domestic product in the U.S., it’s easy to see that succession planning is a major issue facing business owners across the country.
Transitioning a family owned business to the next generation is challenging for many different reasons. This post will review the statistics on family business succession planning, cover three common problem areas, and offer best practices for navigating them.
Family Business Succession Planning: The Statistics
To get us started, let’s review the statistics and examine why thoughtful succession planning for family businesses is so important.
First off, only about 30% of family businesses even make it to the second generation. 10-15% make it to the third, and 3-5% make it to the fourth. These numbers sound pretty low, but they’re only counting businesses run by families’ younger generations. Many businesses are sold or merged, which I would argue isn’t a failure at all.
Additionally, according the Conway Center for Family Business, 40.3% of family business owners expect to retire at some point. But of those planning to retire in less than 5 years, less than half have selected a successor.
That alone tells me that many failed successions are probably a result of poor planning. In fact, other research from the Conway Center for Family Business tells us that 70% of family businesses owners would like to pass their business on to the next generation. But only 30% are actually successful in doing so.
Common Succession Problems
Just to give us some context, the landscape of family businesses across the country is as diverse as our economy. Family businesses cover all corners of industry in this country, and range in size from single person sole proprietorships to Wal-Mart. There’s a lot of space in between those extremes.
Because of the large universe of companies, the specific problems impeding successful transitions is diverse as well. Nevertheless, regardless of a company’s size, industry, profitability and other nuances, succession problems are usually tied to two fundamental issues: poor planning and long term family dynamics.
Entitlement & The Fall Back Plan
Through years of effort and grind, successful companies often produce significant wealth for founders and their families. Whereas the founder may have developed his or her work habits out of necessity, their children are often brought up in a more comfortable environment.
This financial success also gives founders’ children far more options, and allows them to pursue whatever path they choose in their careers. As great as this sounds, flexibility allows the children to treat the family business as a fall back plan, rather than an objective that they’ll need to work toward.
The downside here is pretty obvious. Kids comes back to join the business, and are often propelled into management positions sooner than they should be. Not only are they inexperienced and prone to make critical errors, but their career trajectory will undoubtedly alienate other employees.
Insisting on proper training and screening is a good place to start. You can always give your kids an opportunity, but a job with the family business shouldn’t be an entitlement. Family members should go through the same formal vetting process that other employees do. Implementing a minimum education and/or experience requirement, and formalized training process is a good place to start.
Again – you can always give your kids an opportunity, but resist the temptation to thrust them into a leadership position.
Familial Ties vs. Diversity of Experience
In medium and larger businesses, it’s common for immediate family members to follow their parents to certain departments. For example, let’s say a founder’s daughter is interested in finance and spends most of her career as the company’s CFO. If her children park decide to pursue finance because of their mom’s influence, they often have a hard time developing the skills necessary for upper management. Rather than blazing their own trail in an area of interest or gathering experience in multiple areas, younger generations often tend to go with what’s familiar.
The solution here is to try and minimize the amount that family members report up to each other. All employees, family or otherwise, should be held to the same standards and expectations. Business coaches and mentors can be helpful here as well. Any way to offer outside influence, objective feedback, and accountability tends to help, and will prepare the next generation for management responsibility.
Business Size: Supporting the Family
Starting a business can be quite a challenge, and most founders spend a few years struggling to put food on their family’s plate. As the business becomes more financially successful this tends to be less of a problem. Once founders reach the point where they’re comfortable and have met all their financial objectives, many tend to take their foot off the gas, rather than continue to grow the company.
Now consider what happens when the founder’s children enter the picture. If the founder has two kids, and both kids have two of their own, all of a sudden there are a lot more mouths to feed. Whereas the founder was originally responsible for supporting four people (including the kids and his spouse), now the business needs to support 10! To stay in the family long term, the business will need to generate a great deal more revenue. If it can’t, it will need to merge, be sold, or fold.
To avoid this problem, all new employees should have a responsibility for growth. This could be in the form of direct business development or preparing the business for scaling. A good example might be a new family member that comes on board right after college. They may not be experienced enough to interact directly with clients or develop business, but they could be responsible for updating the company’s CRM system to support more efficient growth.
Successful Family Business Succession Planning
It’s no secret that succession planning is a huge challenge for family-owned businesses. Family dynamics, communication, trust issues, preparedness of the younger generations, and different expectations for family members vs other employees can all contribute to problems.
There are far more causes to the low success rates than what we reviewed in this post. The point here is that many of these issues can be solved or eliminated by prudent planning. Experienced attorneys, accountants, financial planners, and bankers can all be valuable resources who can help you reach a desirable outcome. If succession is in the cards for your business, the input of a qualified professional is often worth its weight in gold.