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Don't Just Hand Down the Family Business, It Might Fail

Posted On
3/2/2016
By
SurePayroll

As a successful business owner, it can be difficult to think about how your company will operate after you hang up your work boots.

While there are challenges associated with keeping a family business alive, the right approach will allow you to do just that.

The Wall Street Journal recently examined "21 family-owned wineries in Germany that were ready to make a generational transition."

Both the current leaders and their children, those who were in the process of taking the reins, were interviewed. In the end, the study found that maintaining a "spirit of entrepreneurship and innovation" can help make the transition easier.

Below are five additional steps that can help keep a family business alive for many generations to come:

  1. Pass along family history. It's important for the new generation to understand what came before them.
  2. Children get started early. Don't wait too long for the next generation to get involved with the family business.
  3. Talk up the importance of secondary education. Furthermore, entrepreneurial parents often push the best colleges and universities, as well as a degree path that fits in with the business.
  4. Learn from the younger generation. Believe it or not, current owners, those who are in charge of the business today, can learn a lot from the younger generation, those who will be taking over in the future.
  5. Leave the business to one owner. One of the best ways to protect a business from a split or being sold is to leave it to one child.

It's almost cliche - the bumbling idiot son or daughter takes over and ruins the family business. However, research is suggesting there may actually be some truth to it. Once the founder of a family run company passes the baton to another family member, the business tends to suffer.

The Wall Street Journal also covered this phenomenon recently:

"Morten Bennedsen, academic director of Insead's Wendel International Centre for Family Enterprise, said that the firms often outperform non-family companies when the founder is at the helm but falter when passed down to the next generation. Fewer than 30 percent of family businesses are still standing by the third generation of leadership, according to research cited by McKinsey & Co., though a 2011 paper in the journal Family Business Review noted similar survival rates in non-family firms."

The Missing Family Business CEO

It's not the only quirk of the family owned business. One metric seems to be true across the globe: CEOs of family firms are absent much more than CEOs of non-family companies. What are we to make of the absent CEO of a family firm? Does it mean the business is humming along on a finely tuned foundation or is it heading for trouble?

The jury is out, say management and consultants who study such things. From the Journal:

"Professors at Harvard Business School, the London School of Economics and Columbia University's business school examined the schedules of 356 chief executives in India and found that family CEOs worked 8% fewer hours than managers without genetic ties to their companies. The researchers found similar disparities in Brazil, Britain, France, Germany, Italy and the U.S."

Family Business Performance

Beyond actually leaving the company and putting their, in some cases, less qualified sons, daughters, nieces, nephews, etc. in charge, how these absences relate to business performance is not fully understood.

Some family owned business CEOs stay away from work more often because they are more oriented toward family and recreation. And, of course, there is the dynamic that since the family owns the company, their position is more secure than CEOs in non-family owned businesses. There is one school of thought that more time away from the office is not necessarily a bad thing.

"Mr. Bennedsen believes family CEOs might be adding value to their firms in ways not captured by the hours they are formally working. They tend to focus more on networking at cocktail parties or hammering out contract details at sporting event, he said, versus professional CEOs who are more "implementers," carrying out plans at their desks."

The Problem with a Family Succession Plan

Come 2017, it's estimated that family CEOs are going to be missing in an even larger way. A survey from MassMutual, Kennesaw State University and The Family Firm Institute found 40 percent of family small business owners expect to retire. Less than half have chosen a successor.

The combination of a lower success rate for second and third generation owners, and the retiring population presents a unique challenge.

It will be key for small business owners to have an exit strategy as they get close to retirement. While it may seem easy to hand the business over to your closest relative, mixing family and business requires due diligence. Just like any hire, you have to make sure whoever you're handing the business over to:

  1. wants the job;
  2. is qualified to run a company and
  3. has a plan to sustain and grow the business. If they don't meet at least these criteria, it may be time to look outside the family for a successor.

If your relative is unequipped to handle running the family business, neither you nor them will be happy.