Family-run companies are in many respects the backbone of American business. They are typically the most stable of small businesses, with a much lower failure rate than other small business models. Some of the largest and most successful companies in America are family owned and operated, yet 70 percent of family run businesses don't make it to the second generation; a full 90 percent never make it to the third generation. These statistics are not new, but appalling just the same.
So why the high failure rate? Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. No plan will correct fundamental weaknesses in a business unless its managers recognize and address those weaknesses. These weaknesses prevent many family owned businesses from realizing much of their real potential.
Please understand, this does not mean all family run businesses are fundamentally flawed. However, those that do have problems are often emotionally unwilling to acknowledge them or, having acknowledged them, are unwilling to make the hard decisions necessary to fix them. While family run companies have a far better failure rate than the average of small businesses as a whole, this is still a pretty dismal record given the advantages such businesses typically have: loyalty, strong family support systems, management continuity, long training periods for the next wave of managers, love and affection, etc.
So here are some of the problems that often occur. If you're the founder of a family run business trying to groom a son or daughter to succeed you, you don't need to accept this list as your own; simply consider the possibility that some of these pitfalls may apply to your company. For example:
- Your son simply may not be a very smart business person. He may have blindly copied your approach over the years, without developing the ability to devise and implement his own approach to problem solving, which is not a good shortcoming for the boss to have. All the love in the world won't fix this one.
- Your daughter may have a very different management style than the one you used to build the business, and she may be successful only if she can adopt a style that works for her. Of course, if you don't trust any style but your own, that won't seem like a very good idea.
- Your son-in-law may recognize that your way of doing things successfully 30 years ago just won't work today with more demanding customers, more aggressive competition, Internet options at every turn, and the big box competitor just down the street. If he sees that clearly and you don't, trouble lies ahead.
- Your daughter-in-law may not have some of the skills needed for your type of business, yet be a very bright, alert, communicative person who commands respect. For example, a Phi Beta Kappa lawyer who steps into a company where she must be the sales manager is in trouble if her brilliance is mostly manifested at the PC keyboard or in a research library. Worse, you may refuse to see those shortcomings, preventing them from being addressed openly. Still worse, you may see them only too clearly, and use them as an opportunity to prove time and time again that no one can do it the way you did. This will invariably prove to be a self-fulfilling prophecy.
If anything sounds familiar here - perhaps your spouse has mentioned it a few hundred times - and you still can't see it, it is possible your eyesight is not what it once was; don't worry, it happens to the best of us. Here are some ideas to help improve your ability to pass the business along intact:
- Treat your children like any other senior manager. Evaluate their performance formally and objectively (as you do with your other employees), and help them work out action plans to correct deficiencies before they become excuses to fail. A child who thinks this is unfair may need to be employed somewhere else for a few years to get a flavor of life on the outside.
- Make a detailed list of the skills needed to succeed in your business. This list should not only include the ones you used to start the company, but the ones that will help the company grow in the environment in which it now does business. You may need help from impartial but knowledgeable outsiders to complete this one, but it's worth it. Then, build your would-be successor's grooming program around that list.
- Get formal training for your children in the areas they need strengthening. Seminars or workshops on topics such as managing and motivating people, business planning and managing money can build valuable skills for your company as well as enhancing the personal growth of your children.
- Rotate the assignments your children get in the company - to give them a strong sense of the company from every direction - not just the functional area they are best in or most interested in. If one of them is to become the CEO one day, he or she must have a total company view to be successful. Each assignment should be at least a year, so they get past the possibility of just "riding it out" and actually get into the meat of the job.
- Ask the honest opinion of others in assessing the performance and potential of your children. They may very well see things you can't see despite your sincere attempts to be objective. Consider a 360-performance review process as a tool that might help your company team grow in addition to being a good way to get others' views of your children's performance.
Your son or daughter could be a great future CEO for your business. He or she has tools available that you didn't have when you started. He or she has the benefit of living in the culture of the business that you built. And he or she has time to prepare before taking on the responsibilities and challenges of the job. Take full advantage of all that potential and help maximize their potential. You'll be helping ensure the future success of your company and a stress-free retirement for you. That's worth a little advance preparation, don't you think?
Gene Siciliano, CMC, CPA, is an author, speaker and financial consultant who works with CEOs and managers to achieve greater financial success in an ever-changing economy. As Your CFO For Rent and president of Western Management Associates, Siciliano has spent more than 20 years helping his clients build financial strength and shareholder value through applied knowledge and process improvement. Gene's book, "Finance for Non-Financial Managers," is available nationwide in bookstores and online. To book Gene for your next event, visit www.GeneSiciliano.com or e-mail gene@CFOforRent.com.