The Second Generation Family Curse
KARL R. LAPAN, PRESIDENT AND CEO OF THE NIIC
Family-owned businesses face a steeper incline than most companies. According to Entrepreneur.com, only 30 percent of family-owned businesses survive into the second generation, and only 12 percent make it to the third. It might seem at times the same reasons that can drive their growth can also result in their demise.
What do I mean? Well, it all goes back to passion. When family ties are involved, the game changes. Decisions can be made on feelings more often than facts, past practices, and family legacy. Emotions, like passion, can run high. Sometimes these factors create the perfect storm of family dysfunction.
Recently, at an event, I asked a business broker why younger generations seemed less interested in taking over the family business. He shared with me that the ideas the next generation have for how to change and improve the company often can’t happen because the previous generation still wants to work in the business and sometimes isn’t open to new and more innovative ideas, so the younger generation decides to go somewhere else.
Keep in mind the following:
- Using outside advisors and experts may be vital to facilitating difficult conversations around ownership transitions.
- If you have commercial borrowing or an existing wealth management relationship with a bank or financial institution, they often have resources and expertise to help in succession discussions.
- Think seriously about how many family members are involved in the business, and how ownership is divided (research suggests that when you have more than 3 owners, the odds of success diminish), what their decision-making capacity is, and how you will handle disagreements and buyouts constructively. Just like a pre-nup triggers a plan if divorce occurs, the same is true for family ownership interests.
- Start planning and engaging future generational owners early in the conversations. Establish ground rules and have clear protocols for the span of control and limits/constraints on decision-making. Be sure to fully understand the dreams/aspirations of the participating family members, and make sure there is family alignment around the goals.
- Figure out if you need an advisory board to keep all family members and the business interests more accountable, and if you plan an owner-managed or manager-managed approach to operating your family business.
If you are involved in a family-owned business, what measures do you take to ensure harmonious relationships with your family and a successful business?