Only around 30% of family-owned or managed businesses survive the transition to the second generation of family leaders. From there, the pool splits again—only 13% of these businesses will stay viable after the third generation takes over, and a rare 3% survive into fourth-generation operation and beyond.1
The successful transition from one leader to the next at a family owned or managed business is critical not just for the sake of the family, but also for the community. Family owned or managed businesses are a governing force in the American economy—35% of the Fortune 500 are family controlled businesses. Such businesses account for 64% of the gross domestic product, 62% of the country’s employment, and 78% of the nation’s new job creation, according to the Conway Center of Family Business.2
With 40% of family business owners projected to retire within the next five years, the decision of who should be preparing to take over leadership is one that is likely keeping many of those owners up at night.3 4 5
The US Department of Labor tells us that one-third of businesses survive ten years or more, but family owned businesses seem to collapse at a faster rate. Many past owners of family businesses attest that new generations taking over the business without adequate preparation or passion contributed to the business’ end.
Start as Early as Possible
When you’re in your forties or fifties, retirement might seem ages away, but the truth is that handing over a family business isn’t something an owner can or should accomplish in a short period of time. By the time the business’ founder is ready to go part time, any family members brought on might be settled in to forty-hour work weeks and not ready to take on more responsibility. When a first-generation business owner does hire the person or people they think will succeed them at the helm of the company, they should ensure there’s plenty of time set aside to focus on teaching those future leaders what will be required of them. The approaches to that education can vary, but most business owners require their successors to do a few years of work at entry level in the company, and some even require their heirs spend years working at other companies first to get a range of experience.
Management vs Ownership
"Any questions about what investments the next generation must make to obtain ownership, and how that generation will be compensated after they’ve taken over, should be resolved before ownership is given."
Part of the reason it’s important to start so early is that the second generation must learn how to be both manager(s) and owner(s). The best place to start is with open family communication about everyone’s wants and needs from the business. Have a family meeting to talk with all involved parties about what roles and tasks everyone wants or doesn’t want to perform. This is also a great opportunity to set rules and talk through any latent frustrations about pay, work ethic, time off, etc. One good strategy to keep everyone in the family feeling supported is to hold some meetings only with parties active in the business, and others including spouses and others who will be impacted by the business decisions. Another is for the founder to formalize a set of management processes that their successors are comfortable with, or for the successors to formalize the processes themselves as a first step of leadership. This approach can minimize frustrations, serves as a good teaching exercise, and allows more room for the second generation to come into their own.
Ownership of the company should be a second stage of the succession after management is in hand. Until the next generation has proven they can lead the company day-to-day, many owners don’t feel comfortable selling or handing down the company they worked to build.
Seek Outside Opinions
Whether it’s your board of directors, your upper management team, or a consultant hired explicitly to help with succession planning, opinions of those outside the family are crucial for a family business owner evaluating and training other family members to take over. These parties can even be involved in some of the discussions about the succession, especially when it comes to formalizing a management process or planning a timeline for the founders’ retirement. Because third party advisors don’t maintain similar emotional ties to the business, they’ll be able to approach the transition from a strictly strategic position. If your family is especially passionate, you can even bring in a professional mediator to ensure the conversations reach their intended goals. Another benefit of an outside advisor is they may see other candidates for leadership at the business, like managers who could take the helm. An owner might feel awkward if they want to choose a non-family member who is more suited to the position over a child, sibling, or other relative, but the objective perceptions of an outsider can give them the confidence and assurance they need to make the call anyway.
Set Goals for All Parties
"Ultimately, carefully considering any chosen successor(s) will not only be best for the business but will also prevent future family rifts and unhappiness down the line."
Once the successor(s) feel comfortable starting the transition, it’s important that all parties involved have goals set along a timeline. For the owner stepping down, this could start out as a goal of minimizing their presence over time. Some owners might want to keep an active role in the business while still enjoying their hard-earned retirement. For the next generation, early goals might be to learn every employee’s name as they gradually take over an ever-increasing number of the founder’s duties.
Create an Estate Plan
Every business owner should have an estate plan to detail what happens to the business in the event of their death, but these decisions are especially important for the family business. A buy-sell agreement might be the right plan for anyone looking to evaluate management skills first before transitioning ownership. In these plans, a triggering event like the owner’s retirement or illness opens up the opportunity for designated parties to buy their share in the company. Others choose to transfer through a living trust, which can also keep the owner in charge for as long as they like. Whichever route you choose, make sure an attorney with expertise in estate planning is closely involved in the process.
Don’t Force It
Lastly, don’t force a succession on unwilling or unenthusiastic family members. This also means conducting honest evaluations of any potential successors in ownership and management roles. It might be the owner’s dream to see his two sons share responsibility for the business once he retires, but if one son is a go-getter and the other just wants the business to run itself, the owner needs to either find the right role for the latter son or talk with him about the situation. Some next generation successors might have their own career goals that don’t include the family business. In those circumstances, it might be better to look towards a more fitting family member or another trusted employee to take over the reins. Ultimately, carefully considering any chosen successor(s) will not only be best for the business but will also prevent future family rifts and unhappiness down the line.
You may have noticed that these bits of advice all have one thing in common: communication is at their core. Just like communication is essential for a happy family life, it’s also necessary for a happy family business life. Whether you’re thinking of retiring in five years or fifteen, starting the conversation about succession will make it less scary and overwhelming for all involved. In cases where the communication isn’t flowing, or you’re talking about legalities like a trust, an outside perspective is not only extremely helpful but might actually be necessary. A family connection to a small business means that business isn’t just business, it can also be personal—keeping both concerns in balance is part of the foundation of family business success across generations.