Most Business Generational Transfers Fail. For as long as people have lived in communities and practiced trades, it has been the dream of mothers and fathers that their children take over the family business. Just as kings pass the crown to their progeny, so too do today’s business owners hope to bequeath their lot to their children rather than retiring and putting the job in the hands of a complete stranger. It is basic human nature to want this, but unfortunately it fails about 70 percent of the time (Williams and Presser, 2001).
So what are those 30 percent of families doing right that the rest of them are missing? Here at The Alexander Group, we have management consulting strategies for ensuring that business owners can see the fruits of their hard work stay in the family for generations, but that means overcoming some significant hurdles that have caused so many others to fail.
There are a number of reasons why these businesses fail, but the following are a few of the most common:
If a second-generation or third-generation family member feels as though they are owed the business and the money that comes with it, they may not have the drive and motivation to keep building the business for growth. Sometimes offspring only recognize the fruits of their parents labor while not taking note of the labor part.
Sometimes, parents will put their children into positions that they don’t actually want. Parents can want their children to takeover the business so badly that they don’t pay attention to what the son or daughter really wants to do with their life. If the next generation is not passionate about the business, then there is no way the business is going to flourish under their watch.
When the older generation retires, they sometimes can take out a lot of the equity in the business to ride off into the sunset, but if the business does not have adequate cash flow it will struggle to stay afloat through any sort of difficult times.
Put as simply as possible, sometimes the next generation just is not qualified to take over the positions their parents want them to take over. Without proper education, experience, and business acumen, how are they supposed to be successful?
Despite all of this, there are some things that we can help with to guide family businesses through that tough generational transfer, including:
One really important step a lot of families skip is gauging whether or not the next generation actually wants to take over the position intended for them. An impartial third party like an experienced business coach can uncover the gap between what the parents want to believe vs. what the true capabilities and motivation of the offspring.
When the kids truly don’t want to take over the business, they are often relieved to have the help of a business coach to help the parents understand the reality. Getting everyone on the same page helps the business transfer into the right hands and preserves the value of the business.
Obviously, the next generation will need a proper level of education to be prepared to run a business. But they also get preparation for running the family business by leaving it for a time.
In order to learn, they should get several years of professional experience outside of the family business. Further, to be sure they are absolutely qualified and motivated, they should be measured for the job against potential employees that are not part of the family.
Those non-family applicants should get real consideration, but even if the job really is meant for the family, consider adding non-family leadership mentors to stay in the business until the next generation is truly ready to lead.
It is not easy ensuring that generational business transfers go smoothly, but by following these tips and engaging an experienced business coach throughout the process, you could be among the 30 percent of family businesses that do make it to the next generation successfully.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.