If your family owns a business, the share of it that you and other family members own may be your and their most valuable asset. It is also possibly the biggest legacy for future generations. You and they probably take pride in the business’s history and the goodwill it has earned from its customers and in its community. Go to any town in America and you will find family-owned stores and businesses that enjoy the kind of customer loyalty that newer companies will need years to develop.
Key Considerations For Family Business
Long Odds Against Long-Term Survival
Many families want to see their business survive and thrive in future generations. However, statistics show that the odds are against long term-family succession. Only around 30 percent of family businesses survive into the second generation and, by the third generation, only 12 percent of family businesses will still be viable. That drops to 3 percent at the fourth generation and beyond.
Clarify Goals and Values
The starting point in thinking about the future of a family business is to look at the family’s goals for the business and the values that inform how it is run. How well do these values conform to standard business principles and practices? In some family firms, employment is based at least to some extent on a sense of birth right or seniority - rather than on merit and potential. The family may want to treat all children the same, in contrast to standard business practice of hiring and promoting based on skills, contributions and experience. A conflict between value systems can create family turmoil and result in poor business decisions.
Hiring Standards
Family members may view the importance of the family business differently. To ensure the long-term success of the business, it may be important to establish standards for hiring family members - for example, only after they have had successful experience in another business of a similar type. Regular performance evaluations should be conducted to assess whether family members are performing to a level deemed acceptable.
Need Sound Practices
Whether managed professionally or by a family member, family businesses should adopt sound practices, including:
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A written business and strategic plan
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A proper management structure (including a board of directors or advisors)
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Regular management meetings
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Performance reviews
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Comprehensive reporting systems
Having these documents and processes in place will provide guidance and direction when family issues conflict with bottom line-oriented business values.
Must fund retirement
The family business needs to be able to fund business growth and personal retirement. With fewer shareholders than a public company, growth capital may be in short supply. There must be plans in place to provide for the capital needs of the company and to fund growth - while also ensuring funds are set aside for family members’ retirement.
In the next part of this article, I will consider the issue of succession, which is often related to a family business’s efforts to get past No Man’s Land and attain its next level of growth.
About the Author
Bill’s career has focused on emerging growth companies that need to get past No Man’s Land and private equity firms that invest in these firms. He also has extensive experience with his own family's business and several others where he has served as an interim executive and advisor. Contact or learn more about Bill here.
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