By Paul Finkle, on Jul 29, 2015
According to the Family Business Institute, family businesses are critical to economies throughout the world representing 80% of all companies worldwide. In the U.S., family businesses employ approximately 60% of all workers and create 78% of new jobs.
Yet, the majority of family businesses do not make it to the second generation. The Family Business Institute found that only 30% of family businesses last into the second generation; 12% continue into the third generation and a meager 3% operate into the fourth generation and beyond.
Why Do So Many Family Businesses Fall Apart?
There can be multiple reasons for a family business to discontinue, but most of the reasons can be summarized by observing that the majority of family businesses failed across the chasm from an entrepreneurial business to a professionally managed, long- term sustaining organization. One reason for this phenomenon is, in our observation, a failure to engage in succession planning. Succession planning can be defined as the discipline of mapping out a vision, long- term strategic direction, and identifying organization charts or staffing plans to supply the organization with the required skills in the future. In order for a family business to cross the chasm to long- term sustainability, it is necessary to bring on professional managers in key roles. It is the rare family business, in any industry, that possesses family members with the critical skills necessary to carry the business into the next generation. The second key factor, is the inability of a family business to adopt a governance structure that enables family members and professional managers to work in harmony.
What Not To Do
In our experience, the number one mistake made by family businesses is ignoring the reality of the need for succession. In short, the train is allowed to run off the track. The old saying applies aptly to family businesses, “If you fail to plan, then you are planning to fail”. A patriarch running a business with an iron grip and planning to bequeath it to his eldest offspring has less than a 30% chance of success according to the Family Business Institute.
Messing Up the Transition
In the sea sweep succession of an organization is where two-thirds of family businesses came off the tracks according to a recent Harvard Business Review article. This includes failing to attract the right kind of talent with the right kind of skillsets to fill future roles is critical. The family business must transition from certain people being the center of the universe to organization charts with the right skillsets supporting the future infrastructure of the business.
The last big area we will touch on in this article where many family businesses fail in the area of succession is governance. Families have certain behaviors and accepted roles which relate to governance in the family business. These roles fall apart quickly when professional managers are brought in with expectations of running the organization according to logical skill based roles. The key ingredient in this area, according to our experience, is to bring in outside consultants and directors. Trusted individuals who can hold up a mirror to key family players, make the case for change in allowing professional managers to be involved and providing insight into good decision making. According to the Harvard Business Review Article, family boards rank themselves performing much worse than non-family boards, especially in the area of succession and talent management. Only 10% of family only boards rated themselves effective at attracting, hiring, retaining or firing employees. There is a key role in strategic planning, governance and succession planning that outside directors can play (on either a formal or a family advisory board) if the goal is to transition to a long- term sustaining organization.
Hallmarks of Success
We have seen the best transitions occur when the following factors are present:
- Long- term vision
- Core values to support professional managers making decisions
- A living strategic plan
- A professional environment where non-family managers can flourish
Succession planning is a sensitive, complicated, and difficult area for a family business. Failing to address it however, is likely to result in either a sale of the business, liquidation or other unfavorable demise. Long term planning is the answer, and the sooner that a family business recognizes this the better off it will be, and the more likely the organization built by generation one will effectively transfer to future generations.
Learn more about how we can put together an easy to follow plan that will get your company launched into the future properly.