Why do family businesses flourish and fail?

It has been long acknowledged that family businesses account for more than one-half of the economy in the United States.  Their long term perspective, entrepreneurial attitude, pride of ownership, desire to build a lasting legacy, and a commitment to each other and to the community are some of the most common characteristics that sustain them. This is true for large and small family companies globally.

These are wonderful attributes, but being a family in business brings its own predictable challenges as well.  Most notable are obstacles of emotional concern. These include family resentment or rivalry, unresolved childhood issues, and past conflicts that continue to interfere with honest communication. There is also a high level of discomfort when forced to talk about aging and death, finances and leadership.

Because of these challenges, even the most profitable family business becomes vulnerable when it is time for a succession discussion. The ability to seamlessly transition from one ruling generation to the next has always been a major stumbling block. This is an obstacle that stands in the way of ensuring sustainability. It also stands in the way of an organization’s ability to thrive in the coming years. 

What are the best practices for transitioning a family business?

Many businesses do evolve smoothly from one generation to another.  Their success is typically based on three competencies:

  1. The ability to have an ongoing, open and transparent conversation. This defines the culture and values that are the foundation of family and the family’s business’ culture.
  2. An awareness and agreement on how decisions are made and who fills the decision-making roles.
  3. A determination to maintain strong, personal family relationships in spite of inevitable professional conflicts.

What other guidance do families need to be aware of when transitioning?

Along with these three key ingredients, many family business advisors agree that just a few additional suggestions can make all the difference in the world regarding generational leadership transition. 

  • Don’t wait too long to identify the next generation of leaders. Even if the succession is years away, if the current leaders are reluctant to look ahead and choose successors, everyone loses. When there is ambiguity over who will assume the top roles, competition can ensue. ‘Camps’ begin to form in support of one person over another. Eventually the people who are in contention begin to jockey for a favorable position. Discord may take hold, creating lasting negativity between the players. This is dangerous because it sets the stage for serious problems in the future.

The decision needs to be made early enough to allow the next generation time to adequately prepare. Otherwise they will not be able to assume the responsibilities of their new roles. Five years, or even more, can afford them the opportunity to learn and grow into the demands they will be facing.

  • The leaders of the company can avoid creating an argumentative and destructive atmosphere when they include the family member in the decision-making. Those who might otherwise have felt left out of the process might be tempted to foster controversy. This can lead to tension throughout the company. By gaining their buy-in, a much smoother transfer of power can take place. The more engaged everyone in the family is, the more empowered they are. Likewise, the more committed they are to the success of the process.   
  • The current leaders of the company have to be practical In order for a new generation of successors to be sincerely embraced within the company.  They must honest assess the talent, ambition, and competency of the next generation. Wearing ‘rose colored glasses’ and being unrealistic about the drive, determination and capabilities of young leaders is naïve. Worse yet, it can be dangerous.

We’ve already said that starting the process early allows the current generation the time they need for adequate training.  Current leaders are obliged to help future leaders get ready for their turn. When starting early, it is as important to use the time wisely. This could require the use of objective, outside consultants, enrollment in a local MBA program or attending industry trade association events and conferences. All of these can help to expand their horizons, increase their emotional intelligence and build their industry expertise.

  • To build a lasting succession, the next generation needs strong mentors from across a range of sectors and experiences. They can, and should, interact consistently, but informally if possible. If the family business has an outside board of advisors, serving as mentors would be an excellent way to tap into their years of expertise. 
  • By starting early, the company leaders won’t feel any pressure to rush through this important process. While they are exploring all avenues, they should also obtain outside help with their family’s business succession plan. At Sobel & Co, our accountants specialize in assisting family businesses through every life cycle stage they face. We work together from start up through succession. Along with the company’s lawyers, bankers, and financial advisors we work on the best approach for the family and the family businesses. 

While there are tax and business ramifications to consider, it is essential not to lose focus on the important role that soft skills play in the process. If the next generation of decision makers is inadequate, it doesn’t matter how well the written succession plan is designed and structured. It also doesn’t matter how carefully tax aspects are managed and minimized. These are secondary to the ability to lead with vision, communicate effectively, motivate and inspire family and non-family employees. It is through the combination of both that the company will be sustained.

A final word of caution

Leaders who are dedicated to the survival of both the company and the family must have a well-documented succession plan for teaching and guiding the next generation.  

Family dynamics play a powerful and influential role. Future leaders need to be counseled to assume the mantle thoughtfully and seriously. They need to be armed with a deep understanding of the magnitude of their position. They will not only be expected to be responsible for sustaining the organization’s profitability and industry status, but they will also need to do so without jeopardizing the family’s reputation in the community. In addition, they will be expected to foster affection, respect and loyalty among the family members.