One of my retired partners, Bill Zachman, used to tell me, “The first generation is the innovators, the second generation is the administrators, and the third generation is the trust beneficiaries.” Isn’t that true? One person takes a risk, invents a product, goes out on a limb, whatever. Through that person’s efforts, a business is founded. Eventually, the reigns are left to the son or daughter. Things are good, business is good, money is flowing, son or daughter is running the business.
Then one day, son or daughter realize that they have neglected one thing, their own children. Not only are their children not prepared to run the business, but they are not prepared to manage their personal finances. Having been the product of successful parents, they do not value the hard work that their parents and grandparents needed to build the business. They are spendthrifts. So, son or daughter sell the business and set up a trust to help perpetuate the family wealth.
The Second-Generation Curse
And this is generally the best case scenario. Most family businesses do not survive the second generation at all. In July, the New York Times ran an article on their website titled, “Lifting the Second-Generation Curse.” In it, the Times reported that only 30% of family owned businesses survive through the second generation. And according to statistics published by Forbes in their July 31, 2013 article, “The Facts of Family Business,” 50% of second generation family businesses do not survive the third generation. That’s a 15% survival rate for family businesses through the third generation. Why?
In the Times article, John A Davis, a Harvard Business School professor, explains part of the problem. He sees “a pattern where the second generation wasn’t developed well and the first generation stayed on too long and didn’t let the next generation take the reins or experiment.” In other words, the first generation founders did not prepare the second generation successors to lead. What’s worse, these same founders did not prepare themselves to retire. But when you stop and think about it, this is quite an understandable situation.
Running a small business is hard. It’s time consuming. Sometimes, it’s all-consuming. And after all of the late nights, after all of the worrying over being able to make the next payroll, after all of the blood, sweat, and tears that built the company from nothing, who would want to entrust someone else to run the company? But that is exactly what has to happen to help ensure that the business continues without you.
“Sticky Baton Syndrome”
One of the biggest problems facing family businesses is the lack of succession planning. Nearly 3 out of 4 family businesses do not have a succession plan in place, according to the latest PricewaterhouseCoopers Family Business Survey conducted last year. The survey also found that half of the first generation founders remain involved in the family business too long. The survey calls this issue “Sticky Baton Syndrome.” The founder may know who will succeed, titles may be changed, but the founder still comes in every day and still continues to run the company long after he or she should have retired.
I have noticed this in several of my clients’ family businesses. Mom or Dad anoints their successor, but continues to come in to work every day, well into their 70s or 80s or as long as their health allows. I have seen the next generation become the face of the company long before they are able to make decisions on their own, due to the founder having a controlling interest in the company. This situation is complicated by a lack of estate planning documents such as powers of attorney, leaving the children ill-equipped to run the business should the founder become no longer able to make decisions for themselves.
Making the Transition
According to the New York Times article, there are more than three million family-owned businesses facing this quandary. By 2050, most of these companies will have transitioned to the next generation due to death or retirement of the current owners. So what can these family businesses do now to help ensure long-term survivability?
First and foremost, build a remarkable business that can thrive without you. In his book Built to Sell, John Warrillow states, “A business reliant on its owner is unsellable, so the owner becomes trapped in the business.” This is true of a family business, too. If you are trapped in your family business, how can you ever successfully transition the business to the second generation?
Second, a succession plan needs to be developed and put in place. You are never too young to need a succession plan. Assuming that the plan will not be implemented for several years, this plan will need to be revisited periodically for updates. For instance, the founder may have small children now. A succession plan may detail a sale to a competitor with proceeds transferred to a trust for the benefit of the children. Later, the succession plan may detail the transition to an adult child. Be sure that your succession plan includes specific details. Set a reasonable retirement date and resolve to stick to it.
Third, you must communicate your plan to key family members, even those not involved in the business. Be sure that your attorney, estate planner, and accountant know the details as well. Lack of communication can destroy the best laid plans.
Fourth, get the next generation involved in business operations – if they want it. The Times article featured four different family businesses and their transitions to the next generation. For two of the featured businesses, the next generation worked outside of the family business for several years by choice. Once these prodigal children returned, they were not immediately given leadership roles. That’s okay. Adjust the succession plan and make sure everyone knows where they stand.
Finally, stick to the plan and retire when the time is right. Don’t overstay your welcome. If you have communicated your succession plan and properly trained the next generation, have confidence in your decision. Just as you must have confidence in your daily decisions running the company you founded.
The Bottom Line
If you have a family business, you want it to be successful. Remember that this success starts at home. Do not build your business at the expense of your children. Train them up and watch them succeed.