Statistics Lie - Three Reasons for Hope in Family Business

If you’re part of a family business, you know that there are many joys and challenges to working with your family members. Whether you are in business with your spouse, your siblings, or your cousins, it’s wonderful on some days and vexing on others. Accordingly, the statistics on family business transitions and survival are concerning. 

Looking at the statistics, the Price Waterhouse “2021 Global Family Business Survey.” that 70% of family-owned businesses have no succession plan, 42% admit a lack of alignment on the best direction for their business, and 80% acknowledge disagreement.

As I said, this data is concerning but not surprising. Many personalities and talents can contribute to the growth of a successful business. This can also be a challenge as leadership gets close to exit. When it comes to personalities in a family, there can be poor alignment on what is the best direction of the organization and lasting legacy of the family. Of course, everyone has internal disagreements. The problem is so few family-owned businesses – only 20% - have established systems and forums for resolving their different perspectives.

And here is where it gets interesting.

There is an estimated $68 trillion in generational wealth expected to transition over the next 25 years. But wait! We know from the data that most companies, whether family-owned or not, do not transition. According to the Exit Planning Institute, only 20% successfully transition to new ownership. Family businesses themselves have a history of 30% transitioning from founder to the second generation, 10% to 15% transitioning to the third generation, and less than 5% successfully transitioning to the fourth generation.

So, what’s going on? Why do so many transitions fail? According to my colleague, John Ward, at The Family Business Consulting Group, 60% of failed transitions can be blamed on failed communication and poor trust. 

Unrealistic expectations are part of a huge trend we are seeing as the “Boomer” generation moves on. A whole generation of leaders believe their team is on board with the exit plan they have imagined yet they haven’t shared the plan with anyone. It’s easy to overlook everyone else’s point of view if you haven’t had the important conversations. This can be surprising at exit time, whether it is a planned exit or an exit due to divorce, illness, or death.  

These statistics are depressing on their face. 

But there are many reasons to see hope. 

One reason to have hope considers the continuation of the family business into the next generation. Most would view the fact that the family business did not pass on to the next generation as a failure. And in some instances that is true. In other instances, the “children” have no interest in working as hard or in the same circumstances as their parents. The leading generation is often shocked and hurt when the next generation rejects the opportunity to continue the family business. Having important conversations, on an ongoing basis, about the next generation’s hopes and aspirations can prepare everyone for this eventuality. Not only does it reduce the elements of surprise and hurt, but it may also bring to light to why next generation may be hesitant to want the reins. Information is power and can be useful is designing a better company regardless. 

You’ve probably heard the old adage “shirtsleeves to shirtless in three generation.” This refers to grandchildren’s inability to oversee the wealth or scope of business created by the first generation. I find it insulting to the new generation of leaders. If the organization fails in the hands of its new leadership, I believe the responsibility to be 100% shared across the generations in terms of preparation. This is particularly true in the operations of the family enterprise.  

The hope comes when the leading generation and the next generation embrace transition planning and preparation together and provide training, guidance and coaching to the next generation as they hone their entrepreneurial and managerial/leadership skills.

It’s possible for families to build the next generation’s competence and confidence by becoming a planning and mentoring organization.  

Too often, however, the leading generation assumes that, just because the next generation grew up in the business, the next gen will form leadership, managerial and financial acumen, and abilities as if Spock himself came down and did the Vulcan mind meld on everyone. It doesn’t work that way. There needs to be an intentional effort to prepare successors. If you build and execute a plan for knowledge and skills transfer, there is a much high probability for success. 

Setting the issue of preparation aside, there’s a second reason to hope: Continuation of a family enterprise is a matter of CHOICE. Being a bit contrarian here, but so what if the business didn’t continue into the next generation? Perhaps that was the best decision for the family and the business! Let’s face it. Things change in life. The buggy whip manufacturer may have made their money in the age of horses but now aspires to change gears and get into a completely different line of work. Interests change. Needs change. Markets change. What made sense to be invested in at one time may not look so smart now.  

Savvy family enterprises wisely examine their options and choices. Even those with fierce loyalty to family legacy know to periodically reflect on whether this asset is serving the family well. Based on that reflection, the family can collaborate and come to a decision about what their future should hold. Exiting the family business may remain off the table, defying the odds expressed in the statistic. Or, maybe, by choice, the family business changes, and that asset is sold. The point is continuation of a family business is a choice.

 

To my mind, making the best choice for the family and its continuation and legacy is the priority, not necessarily the continued ownership of a particular asset. Which brings me to the third reason to hope.  

The other statistics – not having a plan, not having alignment or a way to productively navigate conflict, or transactions failing because of poor communication or trust - each of these failures are rooted in lack of communication and trust.  

If there is a baseline of mutual regard for one another, there is hope. That is, you’re willing to pause, take a deep breath and regard the other members of the family as each being a valued member of the family, despite their bobbles and foils. Communication skills can be developed and improved upon. Trust can be nurtured through transparency, inclusion, and communication. Most of the families that I work with genuinely love one another. They’re just wrestling with the fact that they lack systems for working through issues together and for how to make decisions together. The family must make a choice and commitment to figure it out. That is easier said than done. It takes commitment and energy. Like continuation of the business as a family holding is a choice, so is our approach to communicating and decision making as a family. 

There are so many reasons to start the conversations surrounding transitioning the family business sooner than later. Don’t let your family business become part of the statistics. It’s not a given. There is hope if you remember: 

1. Planning is Power. There are steps you can take to successfully transition a business from one generation to another. Build a plan for knowledge, skills, and responsibility transfer. When we use a plan to guide communication, expectations, and efforts, our probability for success blossoms.
2. Best Decision for the Family Enterprise. Continuing to own an asset within a family portfolio is a choice. Choosing not to keep a particular business in the family may actually be the best choice for the family. Keeping it in the wrong situations may be a bigger failure. Strive to explore, communicate, and decide what is best for the family enterprise.
3. Coming Together. Low trust and poor communication in a family business does not have to be the norm. You can build new skills and systems around communication, process, and transparency to rebuild trust and success within the family enterprise.

We can do this!

If you have questions or something in this article resonated with you, email Martha at [email protected].