According to Joseph Astrachan, as cited by Family Business Alliance, only 30% of all family-owned businesses make the transition into the second generation, only 12% make it into the third generation and only 3% survive at or beyond the fourth generation.
If you are involved in the operation of a family business, those numbers are sobering. Since the majority of businesses are family businesses (some estimate that as many as 90% of American businesses are family-owned or -controlled), what are the reasons for this sharp drop off after the first founding generation?
Unfortunately, there is no one, easy answer — most often, it is an amalgamation of reasons that combine to create a crippling downward spiral. If you take the time to study the commonalities involved in either business failure or business success, you are much more likely to engineer a successful environment conducive to leading your company through the pitfalls that line the path of the startup or maintenance of your family business.
One of the most important factors for success is communication. It is imperative to establish clear and regular methods of communication in your company. Communication must be open, frequent and honest. Also, there should be policies in place that ensure that each member of the group can submit ideas and feel that their suggestions are valued and duly considered.
There must be a shared sense of purpose to rally the troops. If the company vision is not made clear, management can become locked in a tug-of-war with no winners.
I clearly remember a previously successful family business I consulted with that by the second generation was beginning to unravel. The founders had neglected to prepare their children for taking the helm of the company. They had not involved the children in family discussions about the business, they had not required the next generation to participate in any planning or decision-making and their children, as a result, had very little understanding of what the business was truly about.
Another important factor to keep in mind as a family business leader is that although you must treat your company like a family-owned and -operated business, there comes a point in the growth cycle that begs some outside input. Feedback and contribution from business experts become more and more necessary as the business develops into a larger, perhaps global, entity.
I always advise that a family business must be sensitive to interrelationships between not only family members but also outside advisors. Business relationships should be clarified in writing. Roles and responsibilities should be divided and defined so owners and other employees don’t find themselves in a position of confusion.
A successful strategy for many family businesses is to require that children and grandchildren who wish to join the business get outside business experience first. This gives the potential family employee the benefit of knowledge in another environment, which shows them alternative ways of working, managing and producing products and services.
If you want to run a successful family business that you can pass down to the next generation (and hopefully the generation after that), develop a sound succession plan, listen to all the generations at the table and realize that family unity is as important as, or more important than, profit.
This article has previously been featured on Forbes