Many family businesses fail or are sold before they reach the second generation. That’s the bad news. Here’s the good news: family businesses are critical to the global economy’s health. According to the 2021 EY and University of St. Gallen Family Business Index, the 500 largest family businesses employ 24.1 million people and generate $7.28 trillion in revenue.
This reminds me of an old quote of Andrew Carnegie: “Shirtsleeves to shirtsleeves in three generations.” The first generation builds it up, the second generation squanders it, and then there’s nothing left for the third generation…
The causes are surprisingly common but poorly understood. I’ve worked in family businesses for decades. The experience I gained led me to found Successful Succession, a consulting service for succession planning in family businesses. Now I have made it my mission to help other family businesses scale through the generations.
The problem is that many people don’t realise they’re putting the future of their business at risk until it’s too late. Here are some of the most common mistakes people make that could harm their family business.
1. The next generation is complacent
If the generation that’s going to inherit a family business is complacent about their future in the industry, they are likely also complacent about the company’s future. Then you’ve got a problem. Maybe they don’t feel a passion for the work or have their heart in it; perhaps they’re interested in something else; perhaps they take it for granted because they grew up with it.
If family members aren’t hungry to work, really getting involved, then they shouldn’t get to take a big stake in it. They’re still family members, so they can still have access to appropriate financial access, but they shouldn’t be earning huge salaries just because they’re the child of the former owner. Beware of anyone who treats the company like their private bank because they may run it into the ground.
Conversely, you also don’t want the children to feel trapped by the obligation to enter and stay in the family business. Feeling like you have nowhere to go while you wait for the current generation to retire is a terrible way to spend your time.
2. You are not preparing properly for family succession
The issues of complacency and obligation feed into the question of succession, which is one of the leading causes of conflict in family businesses. Succession planning is often postponed until the current generation is ready to pass on the company, or worse until they die. Determining a suitable business successor requires a lot of careful thought and preparation.
That’s why succession training and development are so necessary. You should spend anywhere from one year to five years preparing the next generation. Use this time to help them develop their skills and abilities, understand their personalities, let them grow and learn, and gain leadership and management experience, both in your organisation and with others. Whether internally or externally, they need to work their way up to the position they will be asked to fill. Otherwise, the team in your business won’t trust or have confidence in them, which will inevitably lead to friction and problems.
Ultimately, it comes down to having honest, open conversations with your children and finding out if they have a desire to work at the family business. Sometimes it’s helpful to bring in an impartial third party to provide an outside perspective and help with family business conflict resolution. And if your children are not interested, you should say, “We’ve built this business up; if you’re not 100% committed to taking it forward, we’d rather sell it and give you the money to do something else”.
3. Your family is growing faster than the business
This is a possibly underestimated problem of family businesses. You can try to manage the growth of your business, but families grow exponentially, and you may find yourself in a situation where there isn’t enough work for all members.
You can manage complacency and a sense of entitlement by determining who the right people are for what job and hiring only those who are qualified and committed to mitigating this problem. This also brings us back to the idea of a trust, where family members don’t necessarily have to work in the business to be owners.
Also, remember that families don’t grow uniformly. Say you have two siblings who start a business: One has two children, the other has three. Do you split the company evenly among the five or 50/50? These questions need to be discussed openly and early on and factored into your business succession plans.
4. You are working in bloodline silos
It is surprisingly common for members to work in similar roles to their parents in family businesses – be it finance, marketing, or operations. Silos can be a problem in any business, and in this context, they can prevent children from gaining the broad experience they need to lead the family company in the future.
To avoid this, you need to agree on the purpose of the business. You need to determine where you want to go and what kind of values and expertise you need to get there. It can be helpful to bring in outside mentors to train the younger members and coaches to provide an objective assessment of the situation.
5. You are struggling to provide adequate feedback
Giving feedback is difficult in any business, and family business disputes can quickly arise with the added baggage of relationships and history. Try to change the way you think about these types of conversations. Instead of anticipating you’re going to have a difficult discussion, realise that all you can do is have an honest conversation. Focus on the facts of what happened and what the outcome will be.
A great book Crucial Conversations: Tools for talking when the stakes are high articulates a seven-step for managing difficult conversations.
- Establish what you want from the conversation.
- Ensure the conversation doesn’t stray from dialogue into the defensive.
- Make the other person feel comfortable and safe.
- Master your own story to understand what you’re telling yourself about the other person.
- State your perspective clearly so that the other party understands where you’re coming from.
- Listen to the other person, make sure you understand their feelings, and look for a common path.
- Finally, take action. Agree on what will be done, by whom and when, and how to follow up.
And remember, you have a vested interest in the success of your family members. Be honest with yourself and them about that and your expectations.
Need help with your family business?
I am Stephen Shortt, a succession planning coach, strategy facilitator, team development coach, leadership coach, and personality profiler. Get in touch if you need assistance with your family business or would like to discuss how my family business keynote speaking services can help you plan for a successful succession.