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Creating a Succession Plan for Your Family Business
“All happy families are alike; each unhappy family is unhappy in its own way.” Leo Tolstoy
By Donald Feldman
Date Published: 7/1/2016

 

Businesses controlled by a single family account for 50% of the U.S. Gross Domestic Product, include 35% of the Fortune 500—both private and public companies—and are responsible for 60% of employment and up to 80% of the job creation in the U.S. (Forbes, May 2013). In France and Germany, 40% of the 250 largest firms are controlled by a single family. Contrary to popular wisdom which holds that it is a bad idea to invest in family businesses because family dynamics interfere with proper management, academic studies indicate that family businesses generate a higher return on investment than non-family businesses. See for example Capital Markets and Family Business: Some Surprising Results by Jennifer Pendergast, PhD, (http://www.thefbcg.com/Capital-Markets
-and-Family-Business--Some-Surprising-Results) which shows that publicly-held family businesses outperform their non-family public competitors. In 2011, Mike McGrann, then executive director of the S. Dale High Center for Family Business, presented a paper in which he argued that non-public family businesses generate higher rates of return compared to their non-public, non-family peers. McGrann attributed this high performance to a sense of mission and purpose in the family business. The owner’s long time horizon and sense of mission tend to pervade the entire organization. The B-School mantra of trying to get managers to think like owners is fully realized in many family businesses where the managers are owners. According to Warren Buffet, “Family-owned businesses share our long-term orientation, belief in hard work, and a no-nonsense approach and respect for a strong corporate culture.” 

However, at the heart of the family business is a nagging anxiety—can the next generation successfully own and manage the business? The basis for this anxiety can be found in some well-known statistics—only one-third of family businesses survive into the next generation, 12% into the third generation, and so on. These statistics don’t indicate failure in every case—many successful family businesses are sold to outsiders. However, the “succession anxiety” is well reflected by the cottage industry of family business consultants that has sprung up to counsel families about succession problems. So we are left with the following paradox: how can it be that family businesses, which form the backbone of the U.S. economy, and are more successful financially than their peers have such a troubled record when it comes to succession? We will try to get some insight into this question by looking at some of the issues that the Next Genner faces in family business.

Acceptance by the workforce. When a relatively young family member takes a position in the family business, she must prove herself to her peers in the business. The assumption tends to be that he or she got their job because they are a family member. According to a 2016 PWC survey of family businesses (www.pwc.com/nextgen) 88% of family employees feel “I have to work harder to prove myself to the company.” The family business owners must walk a fine line between encouraging family members to enter the business and not showing favoritism that would discourage other employees. Telling a family member employee that they are not “cutting it” will of course create family discord. The tension at the heart of every family business remains, is this a business or a family? Successful family businesses learn how to walk the fine line between the two. 

Separating home and work life. Millenials famously insist on separating their personal lives from their careers. Next Genner family business employees feel this tension acutely. According to the PWC study, 69% of Next Genners agree that “it can be difficult separating home and work life when working for a family business.” Only 12% disagree. 

Start out someplace else before joining the family business. We think this is almost always a good idea because it gives the Next Genner a sense of confidence in their abilities and a broader experience when they join the family business. Interestingly, PWC finds that most Next Genners don’t begin their careers with the expectation that they will enter the family business and 70% of family business leaders began their careers someplace else. Both the Next Genner and the family business owner must do some “due diligence” on each other to make sure there is a good fit. 

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