Will Your Family Business Have a 2nd Generation?

Will Your Family Business Have a 2nd Generation
We have yet to have the discussion about whether our children should consider being a part of our businesses.  Actually, we have probably discouraged it, as our eldest is in college studying Psychology and the other two boys are on tracks for Global Studies and STEM, respectively.  Why have we done this?  They have been visiting job sites over the years and often review brochures and other collateral material as we create it.  Is it because we have lived through the perils of the economic downturns, and real estate specifically crashing, not once, but twice?  Do most family businesses encourage the next generation to come into the business?  Do they groom them from a young age and set up succession planning to implement it?  We wanted the answers to these questions, so we did some research and it interesting what we found.


First, let’s share with you the number of family owned businesses in the United States and the direct impact they have on our economy, as of 2011:


  • Family businesses generate 60% of the country’s employment and 78% of all new job creation
  • Family businesses contribute 64% to the GDP
  • The average life span of a family-owned business is 24 years
  • The number of family businesses run by women have grown 37% in the past five years
  • 35% of Fortune 500 companies are family companies
  • Family businesses comprise 80-90% of all business enterprises in North America
  • Only 40% of family owned businesses survive to the second generation, 12% to the third, and 3% to the fourth


We should probably not be surprised, because when you think of some of the most successful companies of the 20th century, who comes to mind?  Ford, Rockefeller, Walton, DuPont, Vanderbilt, even Walt Disney had his family in the business.  They have made it past the first generation, but why?


According to the Family Business Confidence Survey conducted in 2012 by Elizabethtown College, the focus on strategic and succession planning has a direct correlation to the size of the family business:


  • The majority of Family businesses without strategic plans are small, with gross sales under $100 million
  • The majority of Family Businesses with gross sales over $100 million have strategic plans
  • One fourth of family businesses with strategic plans are in the first generation
  • The majority of small family business do not have a management or ownership succession plan
  • Of the larger family businesses, only 29% have a management succession plan


It is interesting, that even though only 29% have a formal plan, 95% express some degree of confidence that the family will remain in control of the management of the business.  This implies that succession planning has been more intuitive than intentional.  In other words, it seems logical that our family business will continue, but nothing is done to insure it.


When asked in this survey about the top internal challenges, about a third of the companies placed ‘lack of family unity’ and ‘lack of entrepreneurial spirit’ in the top of their concerns.  Perhaps entrepreneurial spirit is easier in the first generation.  A study by Price waterhouse Coopers (PwC) further conducted an international survey that revealed similar results.  In their study, just over 40% of family businesses said they intend to pass ownership and management to the next generation.  But more than half of those were unsure whether the next generation would have the enthusiasm to do it successfully.  There is definitely a theme from the first generation regarding lack of “spirit” and “enthusiasm” in the next generation.


We can all assume that many family businesses not making it to the next generation can be related to the challenges of keeping a business relevant during economic downturns.  But there are some other issues that family business owners express:


Entitlement: They believe that no matter how they act, the business is there to serve them.


Nepotism: Advancing personnel solely based on the family relationships.


Family Kingdom: The family founder believes that they are the only capable manager, which leads to a lack of appreciation for the next generation.


Lack of Strategic Planning: Family businesses usually start small and don’t organize themselves for growth.


So here is some advice that can help family businesses to have the right attitude to prepare themselves and their business for a future generation:


Be Self-Aware: Look at your role in the business from an outsider’s perspective.


Communicate& Listen: Let other family business members know your concerns and try to understand theirs.


Have a Sense of Humor: Use laughter to cut the tension that often arises in family business situations.


Have Written Agreements:  It is appropriate, and necessary, to have express agreements that clarify responsibilities and establish expectations.


Ask Yourself:Are we going to be a family business or a business family? Will we run the business like a family or like a business that is owned by a family?


We hope this information helps you to determine if your family business can and will survive to the next generation.

Posted By Scott and Heidi Shimberg


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