The Generational Shift in Family Businesses
I’ll never forget the day a client told me about being summoned to the death bed of the family patriarch.
Almost literally in his dying breaths, the patriarch bequeathed ownership of the family business – a 50-million-dollar company – equally to the 2 brothers-in-law. As a final blessing, he told them that he expected they would bankrupt the company by the end of the year.
That patriarch’s prediction did NOT come true – in large part because the brothers-in-law sought our help.
But it very well could have come true, because like many family business leaders, the patriarch did not set up his business or his heirs for a successful transition.
Despite having worked nearly all their lives in the family business, neither brother-in-law had been mentored or trained for their future roles as leaders. And the very first decision they made – to be equal partners and to co-lead the company – nearly doomed them to the business death the patriarch predicted.
While usually in not quite so dramatic a fashion, succession to the next generation is a common occurrence in family businesses. For hundreds of years, family business owners have set out to build a business that is passed down for generations – creating family wealth and a legacy.
These businesses tend to be what I call “family first.”
The family-first business
A family-first business is one whose owners believe that the primary purpose of their company is to provide employment, wealth, and other advantages to family members. This mindset places the family’s interest ahead of the business’s interest. Hence, family-first.
You might recognize some of these family-first businesses in your town. They are typically smaller businesses, they have a unique niche, maybe they have limited competition. Local restaurants, family farms, professional services practices – often named after the founder.
Because the purpose of the business is to serve the family:
- Optimizing performance is secondary to employing that new daughter-in-law, even though her education or training and experience don’t really fit what the business needs.
- Reinvesting into the business or growing business value is secondary to transferring profits out of the business to support the family’s lifestyle.
Historically, family-first businesses viewed employment as a birthright
Many years ago, I had a client with a fifth-generation 100-year-old business. His sales manager was in that role because his father was the previous sales manager. And before that, his grandfather had been the sales manager.
The problem with this situation is that you end up with people in senior leadership roles who lack qualifications or outside experience.
This goes a long way towards explaining why statistics show that over the past 50 years, the average family business lifespan has been cut nearly in half.
Our mission at the Alliance is to reverse that trend.
One of the foundational things that owners need to do is to strike a balance between what is good for the business – and what is good for the family.
The generational shift: moving to become a business-first family
We’re beginning to see an emerging trend – a gradual shift away from being family-owned and operated – towards being family-owned and non-family managed.
More and more business leaders are taking a business-first approach to their business and bringing in outside leadership to build larger and stronger businesses.
A business-first family gives precedence to business needs. This philosophy predicts a longer lifecycle than a family-first business.
In a recent family business survey, 67% of the respondents already had the next generation working in the business and anticipated that they would be the major shareholders in the next 5 years.
It’s great news that these businesses are preparing for their future.
Preparing for generational transition the business-first way
We often help our clients with this transition – easing the process of having one generation develop the necessary leadership skills and experience, while the other gets more comfortable with letting go of the reins.
When you begin with a commitment to being a business-first family, this often means making decisions like:
- Requiring the next generation to get relevant education and outside experience first, if they want to lead the family business
- Determining succession based on whether the heirs can manage and increase the value of the family business
- Involving the future generation at the board level, to gain experience and knowledge, and to participate in decision-making
- Hiring outside management to run the company, while the family retains ownership
- Strengthening governance by bringing in independent board members
This is what the brothers-in-law that I mentioned at the beginning of this article did. They shifted to a business-first philosophy. From that decision, hired non-family executives and brought in 3 highly-qualified independent directors to their family board.
This decision turned their struggling company around, grew it in value, and ultimately allowed them to sell the business for more money than they ever dreamed of.
The business continues to prosper under the new ownership, contributing wealth to the employees and community, and perpetuating the legacy that the patriarch established.
Set your family business up for an infinite legacy
At the Alliance, we believe that businesses are living organisms comprised of people. We also believe that businesses can live infinitely if the company has a dynamic shared vision, strong organizational structure, and a disciplined system for managing.
The very first step in developing this “infinite legacy” is to decide to become a business-first family, built on top of a strong foundation of family values and culture.
To learn more about the full process, see The Prosperity Plan: 9 keys to a business that generates wealth, creates freedom, and builds a legacy.
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