Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

Family Business Generational Transfer Statistics Can Distort Reality . . . and Opportunity

We’ve all seen the statistics: only about 30% of family businesses make it to the second generation and, of those, only about 10% make it to the third.

But, cold statistics can hide or color the truth.

Certainly, people working in family-owned businesses, as well as those acting in an advisory capacity to them, understand how difficult it is to manage such businesses. To be sure, running any business can be challenging on a good day, and when family issues or concerns are layered on top, “challenging” may, in reality, come to mean “downright difficult.”

Still, many families flourish in such environments while others manage to work through the issues day to day. And yet, over time, many just cease to cope and look for the best exit strategy possible, leading to the statistics cited above.

However, while it can be very difficult to manage a business into the second and third generations, it should not necessarily be assumed that the end of family ownership is due to a "failure of leadership." Instead, when ownership shifts to children, siblings, cousins, or to a widening circle of other family members, it's not unusual for the personal and financial interests of these new owners to become misaligned. Individually, they may conclude that they don't have the same passion for the business as did the founders, or that their financial needs are such that it doesn't work for them to have a significant amount of their wealth tied up in the business.

So what do many families often do in these circumstances? They ultimately decide to sell the business or, sometimes, simply shut the doors. But that does not necessarily mean that the leaders or the business have failed. It might just have been that the business and personal goals of the family members in charge became misaligned.

It doesn’t have to come to this result, however. In families that value their shared legacy and promote a passion and commitment to preserving the business in the family, there is an opportunity to counter the statistics, that is, to align the successors’ business-ownership goals with the founders’ legacy goals.

But, this doesn’t just happen; it takes work, real effort with the “prize” held out for the entire family to see and understand.

How? In a nutshell, it takes on-going interactive communication within the family.

It takes finding an appropriate forum to bring together family members who are often separated not only by age, needs, and interests, but also by geographic distance. This is why families with successful multi-generational businesses often create family councils to foster open communication, promote a sharing of the family’s values, provide an opportunity to learn and appreciate more about the business and, perhaps most importantly, to hear and learn from each other about their interests and needs and how to structure compromises that will work for everyone over time.

When we have these discussions, the response at times is, “That makes good sense, but how do we start? And, once begun, how do we keep the momentum going?”

In order to set the structure, build family buy-in, and get the ball rolling, third-party facilitation often proves useful. Future meetings should involve family members in the planning and execution process as much as possible to further promote participation and even a sense of excitement.

With this in mind, think about your family and your business. Among other questions, consider:

• Is there a common understanding among your family shareholders about the direction of the business and the capital needs (e.g., growth and risk vs. capital preservation)?
• Is there a stated policy as to how family enters the business?
• Is compensation structured in a transparent way that rewards work done and results achieved?
• Does the family share a clearly articulated, written set of values? Is there a statement of values for the company as well?
• Is there an opportunity for family members to openly share their personal and financial needs, desires, concerns, and issues to better gauge alignment of interests?
• Is there a formal interactive communication process that is employed? Is there commitment to following it?

However it’s accomplished, if the family sees the “prize” as worth the effort, and is committed to seeking it, the family’s business is far less likely to become yet another statistic.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.