Family Business Succession

I was recently listening to a Harvard Business Review Webinar where the panel was discussing leadership lessons learned from great family businesses. There were several fascinating thoughts that came out of this webinar, but one that stood out to me was the dramatic decline in the success of family businesses when leadership was passed down from the founders to the 2nd, 3rd, and 4th generation. 

Many business owners have a hard time imagining the business they built being owned and/or managed by someone other than their own family.  This isn’t hard to understand, after all who else should own “your pride and joy” (business) other than, “your pride and joy” (children). Unfortunately, statistics don’t tell us that this is a good idea.  Actually the statistics tell us that passing your family business down to your children or children’s children is usually a bad idea. 

Egon Zehnder and the Family Business Network surveyed 89 executives of top companies in their respective industry and geographic market. The study was done in 2014 with the intention to discover what made these top family businesses successful while so many others seemed to fail.

The webinar quoted research conducted by the Family Business Institute to show the difficulty of family business succession plans.

Percentage of family business that last into the:

• 2nd Generation 30%

• 3rd Generation 12%

• 4th Generation+ 3%        

An amazing 70% of businesses fail when they are passed down just one generation.  88% fail into the 3rd generation, and an overwhelming 97% fail when passed on to the 4th generation.  With this knowledge it’s important to be diligent when you are thinking through succession plans.  What you are going to do with your business when it is time for your next season of life should not be an emotional decision, but one carefully calculated and strategically planned.  After all, you don’t want your business to drift off into oblivion, and you certainly don’t want to see you children or grandchildren experience the financial and relational struggles, strains, and stresses that come along with a failing business.

In this Webinar Egon Zehnder and his team revealed several key elements they discovered from their research of successful family businesses. Here are the highlights, as well as questions I formulated for you to gauge your preparedness.

5 Elements of Successful Succession in Family Businesses

1. Successful family succession plans understand the organization’s unique family gravity. That is they understand the underlying family members with the force that is behind their success.  Ask yourself…Who really makes this business a success?  Be honest.  False humility will only set the next generation up for failure.

2. Successful family succession plans establish a strong and structured leadership succession process. In other words they don’t just simply pass the baton to the next generation.  Ask yourself…What specifically is planned to train the next generation of leadership?

3. Successful family successions have a clearly defined corporate governance process. Decisions can’t be made on a whim like they are at home within the family.  Ask yourself…What checks and balances do we have that help us govern our business?  “Go ask your mom,” is not a good process, and that type of decision making won’t help the next generation succeed. 

4. Successful family successions have a clear understanding of what is needed in the family business leader. If those traits aren’t obvious in the next generation there must be a different succession plan developed.  Ask yourself…Do you know specifically what your strengths are as the leader?  And do my children have those same strengths?  There are several good personality and strength finder assessments available online.  For example the DISC Profile (https://www.discprofile.com/what-is-disc/overview) and Myers-Briggs type indicator (http://www.myersbriggs.org/my-mbti-personality-type/mbti-basics/) are two popular options.

5. Successful family successions must carefully manage the integration process.  There must be a specific transition plan, with clearly defined measurables that allow the new leaders performance to be evaluated in a step-by-step approach.  In other words, you don’t just throw them in the fire and hope they can figure out how to survive.  Ask yourself…Can I create a transition plan that will help the new leader have success?   

The full article from the Harvard Business Review can be found here.

It’s clear that family businesses have many obstacles to overcome when determining whether or not the son or daughter should take over the family business. You owe it to yourself, your children, and your grandchildren to carefully consider the important factors that are key to the continued success of the business that you’ve worked so hard to build. The numbers don’t lie. Over 70% of businesses fail after the 1st generation. If you have your doubts as to whether your children can do what you’ve been able to do with your business you need to think about what your other options might be. There are ways to insure that your years of hard work aren’t wasted. Every child has different dreams, passions, and talents. Many times those are vastly different than their parents.

Often times the most responsible decision you can make for your family’s long term financial health is to prepare your business for sale.  For many people the sale of their business is one of the most difficult decisions they’ve ever made.  Having someone help you through this process is important and should create a sense of comfort.  Find a business brokerage firm that understands your local business climate and takes the time to understand you and your business.  Take the time to carefully consider your family’s business situation.  Your family will thank you.