Even with the best intentions for a lasting legacy, family businesses find the odds stacked against them.
Only about 30% of family businesses survive into the second generation, about 12% make it to the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond, according to The Family Firm Institute.
So how can a family business become a thriving enterprise while embracing the advantages of keeping it all in the family?
How to Survive
One of the key challenges is access to capital under reasonable terms and conditions, said Jerry Haar, a business professor at Florida International University’s College of Business who has studied family businesses. Another challenge is generational, as offspring are choosing to work on Wall Street, Corporate America or even launching their own startup, rather than joining the family business.
Still, what family businesses can offer is superior customer service, a most precious commodity to consumers, and a lasting legacy for the community, Haar said.
Family businesses also have the advantages of being able to move quickly in a changing marketplace. “You have the speed and agility in decision making because you have a shorter chain of command. You can make decisions very, very quickly,” said Haar, who is also interim executive director of FIU Business’s Office of Executive & Professional Education.
And for the family businesses that do make it until the second or third generation and beyond, there is a big upside. Because so many of these businesses were created after World War II, the reins have been passed to a generation that benefited from more business and technology education than the founding family.
“There may be a lot fewer of them, but those that do exist will have the speed, agility, the innovativeness and the creativity because those who are taking the reins have had the benefit of this modern business education and a different kind of generational exposure to the way the workplace should work,” Haar said.
Next Generations Focus on Benefits
You start to see a bigger focus on benefits because heirs of family businesses understand the need for attracting and retaining talent. The younger generation will bring in experience with technology and social media. They may better understand the need for technological modernization and growth through acquisitions.
“It’s not like Silicon Valley where you are trying to drive up value, get yourself an offer and do an exit,” Haar said. “No, a family business is something you pass on like an heirloom from generation to generation.”
Importance of Non-Family Board Members
That’s not to say there aren’t challenges. Haar has seen instances where the oldest son is deemed to take over the business, but the sibling that has the real acumen to do it is not considered.
To keep decisions like this from happening, a corporate board of a family business should include non-family members, advised Haar. A study he conducted showed that when you introduce non-family members to the board, there’s a greater likelihood that the company will be more entrepreneurial and have a greater proclivity to look at export markets for expansion.
“And you probably want as your COO someone who is not a family member, because they see things in black and white. There’s no emotional context involved in it,” Haar added.
Some family businesses get to a point where they are coasting on “good enough” – Haar has seen that, too. “Good enough is not necessarily going to be good enough in a highly competitive environment where competitors to the family business could be other families that are really thinking out of the box.”
Businesses may be able to lure back the younger generation that chose to work on Wall Street or in Corporate America. Maybe that startup they launched didn’t work out as planned. “They can come back home, be close to family, have a smaller world to work in with all the good things that a family is, and the potential to make quick and impactful decisions,” Haar said.
Here are some additional best practices family businesses can and should follow, according to Haar:
Family Business Best Practices
- Monitor, evaluate and consider purchasing software and other technology that can improve firm performance.
- Compile a pool of candidates who can replace employees who leave the firm.
- Develop an actual strategic plan for the firm — that’s not just for large firms.
- Consider acquiring a competitor or a firm whose products and services are complementary to that of the family business.
- Consider being acquired if there is no successor available or interested in the firm.
- If #5, determine the actions necessary (perhaps hiring a turnaround specialist) to increase the value of the family firm to gain the best sale price.
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