Family businesses form the backbone of the economy in the United States and virtually every country of the world. It is estimated that more than 70 percent of all businesses are family owned and operated. Moreover, family businesses historically have accounted for the largest portion of new jobs created, which is important to note as our country fights to regain its economic health.
There can be no greater joy than working with the people you love the most. In fact, many studies have shown that family businesses generally outperform nonfamily businesses. One might think this is due to more effort being put forth as it is your name on the front door―and they would be correct. And yes, family businesses have a more long-term perspective than quarterly driven, publically held, nonfamily businesses.
But the top factor that enables family businesses to rise to the top is the level of trust that can exist. Each member of the family knows every other member is doing their best to move the company forward―no double-checking is required.
Indeed, noted investor and Berkshire Hathaway, Inc. CEO Warren Buffet declared in his 2009 letter to shareholders that family businesses were at the top of his company’s acquisition list because it was always looking for “sellers who truly care about the future of their business.”
Surprising Survival Rate
Unfortunately, there is also another more sobering statistic: more than 66 percent of family businesses do not survive into the next generation. Interestingly, this percentage stays fairly steady from one generation to the next as less than 4 percent make it to the fourth generation. The reasons for failure differ, but the odds stay basically the same—not good.
Given the nature of a family business, it is really not hard to understand why; the purpose of a family is to provide unquestionable love and support, while the purpose of a business is to run as efficiently and effectively as possible in order to make a profit. These two purposes do not necessarily fit together.
The reasons the next generation fails at taking over the family’s business are numerous. The list of potential pitfalls is seemingly endless with issues including business myopia, inter- and intra-generational conflict, liquidity demands from inactive shareholders, and a lack of preparation.
One of the hidden, dirty little secrets about family businesses is that they can have a higher proportion of individuals with alcohol and chemical dependency and mental disorder. That’s not because the business drives them to it, but because a family business has the motivation and ability to ignore and cover up these situations.
Secrets to Success
There are certainly no quick fixes, as every family business is different. Nonetheless, allow me to highlight some key points in successfully managing a family business:
- Try to establish common goals. Pulling in opposite directions will cause conflict in the family and not just stagnation in the business, but potential disaster. Aiming for the similar goals makes success easier with everyone rowing in the same direction. If common goals can’t be constructed, then perhaps a discussion should be had about someone leaving the business.
- Understand that a family business is a system. More specifically, it’s a system among A) family members, B) those who work in the business, C) those who are owners, and D) all of the intersections between A, B and C. As a system, any change in one area can impact completely different areas.
I had a family-business client where one of the siblings not in the business decided to ask her mother permission to open a new branch of the business. The reverberations of that request were felt among all the family members, those inside and outside the business, the employees, and the outside investors.
- Governance is essential. Have regularly scheduled meetings, a family employment policy, and ensure appropriate agreements and policies are in place. Additionally, consider a board of advisors.
Family businesses typically are founded by someone who had an idea to make some money. They struggle to make it work and make it successful, and what they know about running the business was garnered from 100 percent on-the-job training. However, as the business moves into succeeding generations, running a business by the seat of your pants no longer suffices―especially when working with siblings or cousins.
- Communication is fundamental. Business is tough. Working with family is tougher. Without good, open, and regular communication, conflicts and animosity can build, affecting the harmony of the family and the performance of the business.
I attended a seminar a few years ago where I asked a panel of Steve Forbes; McKay Belk of Belk, Inc.; and First Citizens Bancshares, Inc. CEO Frank Holding Jr., all leaders of significant family businesses, what the secret was to the success of their family business. All concurred that good communication was the bedrock.
Further to this point, active listening is critical. Conflict can occur when someone feels that they have not been heard. Next time you are having a heated discussion, be quiet, listen well, then repeat back to the speaker what they said and ask if you understand correctly. If they say yes, you can move on. If not, keep trying until you get it.
- Don’t force an unwilling successor into the business. Moreover, don’t allow them to rise above their level of competency.
One of my clients was working hard to prepare his son for the leadership role. And while the son was quite adept at the business, when asked about what he did after work he lit up describing how he played the guitar at night in a band. Moreover, his dream was to get his Ph.D. in philosophy. He had tried to tell his parents he really wanted to pursue his own life dreams, but they would not hear it.
- Allow successors room to grow. Many family business owners and founders become emotionally dependent on the business and are reluctant to make space for a successor, which makes it difficult for the next generation to fully develop before taking over leadership roles.
This issue is much more common than people realize. All the focus is on the up-and-coming generation and if they will work out. If their parents do not give them the opportunity to spread their wings at work―and sometimes make mistakes―their ability to effectively run the company in the future will be compromised severely.
Working in a family business can certainly be a joy. However, too much family can be hard to take. Simply being aware that succession does not happen naturally in a family business and that it takes some effort to make the transition really is the true first step to success.
Facing the challenges of family businesses and taking proactive steps to manage them can make for a harmonious family and a successful business for generations to come.