Handing Over The Keys To The Family Business

Many business owners spend decades building successful firms with the hope that they will one day pass those businesses on to their children. However, more often than not, their adult children don’t want anything to do with the business. Statistics show that less than a third of family businesses survive into a second generation of family ownership and only 12% make it to the third (according to management professor Joseph Astrachan of Kennesaw State University in Georgia).

Why do most family business transitions fail?

It could be because of issues within the business, such as an ineffective leadership succession plan or the failure of the owners to modernize the business over time. However, too often the failure to keep the business in the family stems from the conflicts that arise when family dynamics collide with business dynamics. The intersection of family relationships and business decisions often proves so challenging that family members believe the best way to maintain peace is to sell the business.

Though each family is different, there are several common challenges to be aware of when it comes to family dynamics. Some of the most common include:

• The sticky-baton effect. While a founder’s strong vision can be essential to a company’s initial success, this level of control may suppress other voices in the family and make it difficult to ultimately pass the baton. Business founders may talk about succession but have trouble giving real authority to the next generation. This dynamic can create a lack of trust and respect among family members due to a perception that the next generation isn’t ready to handle the responsibility.

• Confusion about family and business goals. Family members will naturally have different opinions about how to manage their businesses, but they face serious disagreements down the line if they are confused about the ownership, employment and compensation policies. When thinking about how the business is structured and managed, families should consider basic questions: Who is considered family when it comes to the business? Who can own shares and how are they passed down? How are different family members treated within the business? Families can avoid conflict if they get clarity on these things.

• Poor communication. Communication is key to a thriving family business, yet at times tensions between family members may create an environment where they no longer listen to one another. Family members may stop speaking altogether or simply get caught up in unproductive conversations that limit their ability to constructively engage.

• Changes in risk appetite. As family businesses pass ownership to the next generation, the new leaders might lose their appetite to take business risks; they may become more focused on preserving the wealth they’ve created rather than seeking entrepreneurial ways to grow that wealth. The next generation may also resist pressure by their predecessors into making riskier decisions, ones that, when poorly executed, could erode a family’s fortune.

These common situations can contribute to an environment of anxiety and frustration within the family and drive its members to give up on the business. However, these clashes are by no means inevitable. There are many ways to improve family dynamics, and ultimately, the chance of a successful business transition.