Why Succession Isn't the Only Path to a Successful Family Business
By Kyle Danner - September 19, 2019
Only 3% of family businesses make it to the 4th generation.
Think about that statistic for a moment. It's terrifying, isn't it? Especially if you're the owner of a family-run business.
Usually, someone will bring up this statistic as proof that family businesses are doomed to fail. Conventional thinking states that troublesome family dynamics interfere with business decisions, causing wealth to diminish as each successive generation takes over.
People can't keep family and business separate. As a result, the two will eventually collide with each other, causing irreparable damage to both parties. Or so you may think.
The 3% rule is generally accepted as fact, yet does anyone ask where this figure came from?
John Ward, a scholar of family business, studied 200 privately owned firms in the 1924 edition of the Illinois Manufacturers Directory. Ward tracked the firms’ performance over a 60-year period and found that 13% lasted to the third generation. Of those, only 3% grew significantly and lasted to the 4th generation.
Ward published his research in his book, Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability, and Family Leadership, in 1987. He summarized the information later in an article of the Summer 1988 issue of Family Business Review, “The Special Role of Strategic Planning for the Family Business.”
Ward's findings were fascinating, but they also raise an interesting question. Is the only definition of success passing the family business from one generation to the next? Or is there another way of looking at success that could transform the way you see your business?
How You Define Success Determines Your Success
It’s generally assumed that succession is THE sign of success. And why wouldn't it be? You created your business from scratch. Of course you would want to pass it on to your children and their children.
But not all businesses are the same, and not all families are the same. While one family-run company might stay in a family for generations, another might change hands after the kids have kids of their own. Does that mean the second business failed? That all the hard work the owner put into the company was for nothing?
If the business owner's only definition of success was succession, then yes, he or she missed the mark. But if their vision was to transform their passion into a profitable business, not necessarily. Just because the business was sold doesn't mean it wasn't successful. Now, the owner might be able to retire and spend more time with their family, feeling confident that their business is in good hands. That seems like a pretty successful life to me.
Here are a few other examples of what success could look like in a family business:
- A husband and wife open a small restaurant. Their goal is to make enough money to send their kids to college. Once the kids graduate, they sell the business and retire. Their kids go on to pursue their own dreams, and their business does well under its new ownership.
- A daughter serves as the CEO of her father’s company. She and her husband do not have children, so there is no third generation. She sells the business and starts a foundation for a cause she is passionate about.
- The grandkids inherit the factory their grandfather started and their father managed. The market shifts, making the factory obsolete. They sell and use the proceeds to start a new technology firm. The old business goes under, but their new firm stands the test of time.
In our three examples, the existing firms were not passed to the next generation. But did they fail? It’s hard to argue that they did.
We have to move beyond the bricks and mortar of the business and consider another definition of success: preservation and growth of family wealth. Doing so opens new possibilities for family success and avoids potential problems.
If the 3rd generation mentioned above remained committed to owning the factory due to family prestige but lacked the resources to meet new market challenges, they could lose everything. This includes the family prestige that they wanted to protect. By selling, they save the fruits of their grandfather's and father’s labor and use the proceeds to start a new venture with the potential of increasing the family’s wealth.
Are You Confident in the Success of Your Family Business?
It’s time we reconsider what we mean by a successful family business. Passing the original business to the next generation is not the only definition. As business owners and advisors, we must expand our thinking and consider how to preserve and grow the family wealth.
After all, what's the point on holding onto the family business if it means losing everything?
If you still want to pass your business onto the next generation, there's nothing wrong with that. But you shouldn't start the succession process without considering all of your options.
Let's walk through it together. As a Certified Exit Planning Advisor (CEPA) from the Exit Planning Institute, I can help you evaluate your options so you can choose the best one for your business and your family. Schedule a free meeting to get started.