Many business owners spend decades building a successful firm with the hope that they will one day pass it 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 (Source: Joseph Astrachan, Ph.D, editor, Family Business Review).

Why do most family business transitions fail?

It could be due to issues within the business, such as an ineffective leadership succession plan or the failure 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 between family relationships and business decisions often prove so challenging that family members believe that 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. They 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 around family and business goals—Family members will naturally have different opinions over how to manage the business, but confusion over policies surrounding ownership, employment, or compensation can often lead to serious disagreements down the line. When thinking about how the business is structured and managed, families should consider basic questions such as: 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? Providing clarity around these processes will help avoid eventual conflict.

• Poor communication—Communication is key to a thriving family business, though at times tensions between family members may create an environment where they no longer listen to each other. Family members may stop speaking altogether or simply get caught up in the same unproductive conversations that inhibit the family’s ability to constructively engage with each other.

• Changes in risk appetite—As family businesses transition ownership to the next generation, the appetite to take business risks from company leadership often decreases. Family members may become more focused on preserving the wealth they’ve created than entrepreneurial ways to grow that wealth. However, the next generation may be pressured by their predecessors into making riskier business decisions, which when poorly executed could erode the family’s fortune.

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

Some Families Have It Right—What Are They Doing?

Family businesses that survive through multiple generations of ownership tend to have a combination of both good family and business governance. Though family governance shares many elements with basic business governance, it is intended to help clarify each member’s roles and actively manage the family’s expectations for the business. When both these governance structures are in place, it creates a solid foundation for transitioning the business to the next generation.

First « 1 2 » Next