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The phrase “Family Business” can conjure up various images. One may be an image of multiple generations of family members working happily together to provide income and a sense of security for the entire family. Each family member uses his or her skills and abilities to successfully run a business enterprise which they are all equally passionate about.
Another image may be that of family members going to the same place of work each day merely to do what needs to be done to keep the business operating. There is very little meaningful interaction with other members of the family. Each person is essentially working in a vacuum – no real joy or satisfaction is derived from the daily activities required to keep the business running.
The reality of family businesses is often somewhere in between the scenarios described above. Around the globe, America stands alone for our stories of entrepreneurship and the evolution of family businesses from ideas to brand name success such as Ford, Phillips 66 and Walmart. Yet, we hear statistics that 70% of family-owned businesses in this country will not make it through two generations. Why?
There could be many reasons behind that gloomy percentage that are perfectly reasonable, but in my experience, most founders would be thrilled to see their efforts across generational lines. G2 and G3 owners serving G2 and G3 and G4 customers, expanding the capabilities and the reach of their companies while preserving the vision and values that won G1’s success.
As a member of the executive team in three different companies, I was able to observe from the inside. With that direct experience, I can distill my experience down to one of the most important factors required to support multigenerational family business success.
All three companies are in different industries, each is currently in a stage of family ownership and control, and they have all experienced generational obstacles along the way.
Company A is now in the hands of a fourth-generation family member, the only descendant of the founder active in the business today. However, while the business is sound, at an earlier peak, measured by gross revenue, employees, and capital investment, four family members from three generations were involved. G2, who had led the company through 40 years of growth, faced the challenge of passing the business along to G3, while at the same time addressing the interests of those family members who were not active in the business. There existed an unspoken awareness of the need to do some estate distribution planning, but no action had been taken.
Fortunately, an outside advisor who had been engaged for life insurance planning purposes, recognized the need for transition planning and took the responsibility to get positive dialogue started between generations. As an experienced neutral party, his planning expertise led the owners to integrate the goals of both generations and played a key role in establishing continuity for the business. Today the business model is very different from what began 82 years ago, but it is operating profitably for G4.
Company B has been in business for 35 years, and the family’s G2 has controlling ownership, along with two outsider shareholders. The business is healthy and so is the relationship between G1 and G2. But at the beginning of that transition, odds of success looked slim-to-impossible. G1 and G2 were opposites in strengths and weaknesses, and as obstacles arose communication became contentious or nonexistent.
Eventually, they reached an agreement to create an outside Board of Directors, empowered to give direction for future growth and maintain the profitability and continuity of the enterprise. In time it became a sounding board for G2, achieving trust instead of resistance from both generations.
Company C has been run by its founder for over four decades. G1 and G2 both want to keep the business in the family. It remains successful with great growth potential. However, while G1 grapples with the need to let go, G2 wrestles with old school systems that need to be upgraded. While I was an insider observing the impasse that was building, I saw clearly how this very common story must be the cause of the failure of 70% of family businesses.
The help of an outsider who can manage communication between generations and set the agenda for the transfer of ownership and control was introduced to both sides. So far there has been much foot-dragging. However, I am confident that eventually G1 and G2 will realize their differences can be resolved with the help of a new set of eyes and insights.
None of these family businesses are likely to knock Walmart or Phillips 66 or Ford out of top ten family business lists. Yet, the owners are content to know their businesses can assure family financial security and harmony across generations. But going through that transition experience can look daunting for multigenerational companies.
What they all have in common is the realization that communication makes or breaks the transition. And that outside advisors are generally the key to communication breakthroughs. As advisors, we must provide a framework that will nurture meaningful communication—in quantity, quality, and consistency—among family members for any plans to transition family businesses from one generation to the next.