There’s no magic bullet for making your family-owned business hum smoothly along from one generation to the next.
The good news? You can learn from successful family-owned businesses that have made it to the second, third, fourth and even fifth generations. I took some time to think about my most profitable family-owned business clients and identify what they all have in common. Here’s what I came up with.
1. They Face Difficult Decisions Head On
Successful business owners aren’t afraid to stare down difficult decisions in the face. But in a family-owned business, where you have family relationships in the mix, things can get messy fast.
Just because your son shares your last name, for example, it doesn’t mean he’s the right person to take over the business when you retire. Likewise, promoting a qualified long-time employee to president, instead of your daughter who doesn’t have enough experience yet for a leadership role, can ruffle feathers.
Decisions are particularly difficult when you mix family and business, but it’s absolutely essential to make those difficult decisions with the overall welfare of the family business in mind.
2. They Have an Exit Plan
The numbers don’t lie. Unfortunately, studies show that only about 70% of family-owned businesses make it to the next generation. According to the Family Business Institute, only 12% of family businesses are still around in the third generation, and only 3% are still operating in the fourth generation.
If those statistics show us anything, it’s that transferring a family-owned business from one generation to the next is no sure thing. It’s tricky, and that’s why you need a detailed exit plan that lays out a clear roadmap for you, your business and the next generation of leaders.
Having an exit plan in place — and sticking to it — can help remove some of the emotional stress of making difficult decisions like the ones described above.
If you’re already in business, you hopefully already have an exit plan. If you’re starting of thinking a family business, now is the perfect time to start thinking about your exit. That’s right, the ideal time to plan your exit from the business is before you even start the business.
Regardless of where you are in the exit planning process, we have a resource that’ll help. Check out our Quick Guide: Exit Planning for Family-Owned Businesses.
3. They Are Honest With Family Members
This one speaks for itself and falls in line with “they face difficult decisions head on,” described above.
Say you have three children and all of them want to be involved in the family business. You, as the business owner, have to be honest with yourself and your children. Not everyone can be the president. Be honest with your children about their skills and abilities. Make your intentions known sooner rather than later (refer to your exit plan!) and be honest about what is best for the family business.
4. They Aren’t Afraid to Rely On Outside Advisors
The family-owned businesses with the most impressive longevity often keep things close to the vest. But that doesn’t mean they avoid seeking help from outside advisors. In fact, owners of successful family businesses realize how critical it is to get the objective input of non-family members who aren’t involved in daily operations.
Those owners know that when family and business mix, emotions often get in the way. When things get heated and messy, outside advisors can help bring down the temperature in the business.
At a minimum, your team of advisors should include a CPA, attorney and banker.
5. They Hold Non-Family Members and Family Members to the Same Accountability Standards
Some of the strongest family-owned businesses tap into the expertise of non-family members to help run the business. Some of those employees are just as dedicated to the business, and knowledgeable about it, as family members.
But tread carefully. One of the quickest ways to undermine a good employee’s positive attitude and dedication is for the business owner to show favoritism to a family member.
When that outstanding employee sees Jack, the owner’s son, consistently roll into the office parking lot at noon in his shiny new Tesla, don’t expect it to go unnoticed by employees. The most admired family-owned businesses have a reputation for treating employees and family members fairly and equitably.
6. They Embrace Change
Don’t be comfortable with “this is what we have always done,” or you’ll be the last family business making wagon wheels.
While your business might have made it to the next generation, is it poised to make it to the next? Ask yourself if you’re offering products and services that are still relevant. Do you have a plan for how to differentiate your business from the competition in a crowded market? You get the idea.
Change is inevitable and must be embraced by any business that wants to remain successful in the future. Make sure your stakeholders are on board with the need to evolve.
7. They Don’t Ignore Financial Reporting and Oversight
Many family business owners see financial reporting as a necessary evil, but accurate and timely reporting can quickly show where the company is doing well and where it is not.
Embrace and prioritize financial reporting to help your management team make decisions in real time. Make an effort to delegate financial functions to various individuals, particularly when cash is involved. Include a qualified and trusted family member whenever possible. Accurate and concise financial reporting on a timely basis, along with tight internal controls, can help ensure your family’s business success in the future.
8. They Keep Family Emotions and Dynamics In Check
A struggling family business is bad enough, but a struggling family is even worse.
Although the business might close at 5:00 PM, work and home too often overlap in family-owned businesses. Make an effort to separate work time and family time for the good of the business and the good of your family.
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