How to Build a Family Business That Lasts

When asked, the majority of American business owners say that they want to pass their businesses on to the next generation. Sadly, fewer than half have them actually have opportunity to do so. Some variation of the phrase “shirtsleeves to shirtsleeves in three generations” can be found in almost every language and culture: The wealth gained in one generation will be lost by the third generation.

Statistically, the chance of a family business successfully transitioning from the first generation to the second is around 30%. The odds get worse as you move to the third generation – less than 10%, which is pretty disheartening if you’re a family business owner.

Of course, there are a number of extremely successful family businesses out there that have managed to keep it “in the family” for generations.

How do they do it?

There are a few basics that are great places to start: treat each other with respect, leave business at the office, and minimize feelings of entitlement and nepotism.

But there’s another commonality that’s often overlooked. Successful family businesses take succession seriously. A recent survey co-developed by Kennesaw State University’s Cox Family Enterprise Center and EY’s Global Family Business Center of Excellence reveals the extent to which succession planning is built into both the family culture and the business culture. These companies recognize that succession planning is 100% necessary in order to sustain and grow a multigenerational business. According to EY’s Americas Family Business Leader Carrie Hall: “It’s arguably the most important thing for a business to think about because when done poorly it’s so devastating.”

Elements of Successful Succession Planning

During the planning and execution phases alike, it’s essential for successors to fully understand all aspects of the business, including day-to-day operations, company finances, long-term business cycles, how to hire and manage employees, and how to negotiate relationships with partners and vendors. At the same time, they also must find innovative ways to maintain profitable growth in the face of competition and an evolving business environment.

This is a pretty tall order, which is why dedicated, comprehensive planning is key to success.

Overcoming barriers during a family business transition will be easier when there is complete transparency during the process, development of a strong family governance structure, and a strategic, written succession plan.

Make sure that you give yourself and your successors enough time for the transition process, and that you’re informed about all of the choices available so that you can make the best decisions for you, your family, and your business.

Succession planning and choosing a successor for a family business can be fraught with challenges and it can be unsettling. Especially in small and family businesses, succession planning can involve a lot of emotional turmoil. It is often helpful to turn to an outside, impartial group of advisors for help with navigating the process. Having a sound succession plan in place can help take some of the emotion out of the planning and help ease the transition for both the business owner and his or her successors.

The Big Picture

Succession planning is only one piece of comprehensive business transition planning. There is no one-size-fits-all formula for successful transitions.

Depending on your business, it could take three to five years to comfortably organize and implement an effective succession plan and there are a number of financial decisions that will need to be made (e.g., whether to gift or sell shares to heirs and how to keep the taxes to a minimum).

Inevitably, there is a lot of family wealth to protect inside a business. Owners have choices in what type of ownership transition strategy and succession plan will be most beneficial for them, their family members, and their business.