Too few family businesses survive into the second and third generations of ownership. The reason is most often poor communication between family members. Current owners should take steps to strengthen their family dynamics and assure that damaging emotions do not scuttle the enterprise when it comes time to hand over the reins of control.
In the best of worlds, a family business would thrive for many generations, providing inspiration and revenue for decades to come. Reality, alas, is usually more somber. [rquotes] ‘Only 30 percent of family businesses survive into a second generation, and only 17 percent into a third,’ [rquotes] says Kathyann Kessler Overbeke, principal of GPS: Generation Planning Strategies, Beachwood, Ohio.
Why? Too often the emotions of family members conflict with the demands of the bottom line. “Family businesses are made up of two complex, overlapping systems,” says Overbeke. “One is family and the other is business. The overriding factor that determines success or failure of a family business is management of that space where the family and the business systems overlap.”
Worlds in collision
Failure to manage family-business conflicts can lead to disaster. Consider, for example, the damage that results when siblings compete for the position of company president. Aware of the emotional time bombs linked to any decision on succession, the parents often opt to ignore the issue.
Similar conflicts abound: A favored son expects to be handed the reins of control; an objective assessment points to a daughter as the most promising heir.
Such conflicts are typically left to simmer on the back burner because of the common fear that a business-like negotiation will damage family relationships. “In a family business, inadequate communication is problem one, two and three – all the way to infinity,” says Paul Karofsky, Founder of Transition Consulting Group, Palm Beach Gardens, Florida. “Too often family members fail to talk with one another to understand differing perspectives, desires, and concerns.”
Letting conflicts fester puts the business in danger. “Emotions quickly end up driving critical business decisions,” says Pervin. “The enterprise becomes riddled with controlling and enabling behaviors, craziness about who’s best and who’s smarter, and maladaptive communications systems.
Share your vision
Family businesses can obviate all of the above by establishing a common business vision, says Overbeke. “There needs to be a shared understanding of the purpose of the business, beyond just making money. People who possess a shared vision will be willing to make the necessary trade-offs.”
Overbeke offers one example of a shared vision: We want the business to support the family for several generations. Those who accept that overriding goal must then ask what everyone needs to give up to achieve it. That may well include the ability to take money out of the treasury, for example, when the business cannot afford it. Or giving up an ambition to succeed the presidency when another sibling is better qualified. Or taking steps to secure the senior generation’s retirement while funding the growth of the enterprise.
The comments above have concentrated on family members and their psychology.
For all of these stakeholders, decisions touching on the professional advancement of the younger generation can have profound effects. “If the suppliers to the business aren’t enamored with the new management, they may pull their distribution franchises,” says Karofsky. “Suppliers want sustainability. It is vital to them.”
Bankers, for their part, will be looking for attractive partners. “The relationship with dad may well have made possible a vital business note or line of credit,” says Karofsky. “If the banker is not enamored of the succeeding generation, the loan might be pulled, and that might be the end of the business.”
These comments suggest that the family business exists as part of a fabric that includes third parties beyond the bloodline. Those parties need to be brought into the decision-making about the future of the business. And they need to accept the validity of the new people assigned to ownership and management positions.
Transition, not succession
While taking on non-family management may be emotionally challenging for the family, it is one more example of the benefits to be gained from skillful management of the interface between the enterprise’s family and business systems.
Even here, adds Pervin, the family members must have ownership skills. “That means people who can make decisions, who understand planning, strategy, finance, organization, and risk management.”
In brief, Pervin suggests suspending the view of the business as a family enterprise and looking at the assets through an owner’s lens. “People want to transfer the business to the next generation for many reasons, and not necessarily the right ones,” he says. “I believe in continuity planning, a process of figuring out the next best thing to do with the business assets.”
Filling the gap
It may well be unclear if the second generation is capable of taking on the reins of management, or if they might be able to do the job with some additional education.
One caution: “It’s also important that the personality of the non-family leader be compatible with the culture of the family,” says Karofsky. It’s best to proceed slowly, introducing the proposed manager to all of the affected parties. Does the prospective manager understand, and buy into, the vision shared by the family members?
“The company needs to devote adequate time to position the next generation,” says Bryck. “That process includes getting family members to grow from operational jobs to leadership positions, assuming they are capable.”
Time must also be sufficient to recruit where necessary, to assess candidates, to create professional development plans, and to help the senior generation move to roles of significance. “The transition needs to be an exceedingly cautious, well played out scenario,” says Karofsky. “The chances of surviving are greatly enhanced when planning is done sufficiently in advance.”
Given sufficient time and dedication, you can assure your family enterprise stays afloat when it’s passed to a new generation. Above all, the communication gaps and unstated emotional conflicts need to be resolved in a way that recognizes the fraught interface of family and business systems.
“The biggest reasons for the failure of family businesses are poor leadership, unresolved conflicts, and the inability to agree on goals and share a vision,” says Karofsky. “That was true in years past and it remains true today.”