I deal with several multi-generational family businesses in my coaching practice, and I have to say that they have some of the most interesting dynamics of any of my clients. The blend of familial ties, business place politics and real world economics can make for some really animated discussions in our weekly sessions.

We have all heard the apocryphal stories of how Grandpa (or less commonly Grandma) starts a business when he has a young family, working every hour available, foregoing vacations and family time to build “the company” into something of value. Dad (or Mom) works in the business and experiences the same level of sacrifice as Grandpa, then eventually inherits the business. 

Meanwhile, the business has grown, become profitable and is allowing everyone to have a comfortable lifestyle. Then Dad/Mom have their own children. These children have never experienced hardship or sacrifice, and consequently they see the company as a glorified ATM. They can’t wait to get their hands on it, and once Dad or Mom hand over the keys, they sit in their office (sometimes metaphorically, sometimes in reality) with their feet up, counting the cash. Their lack of attention to the business – it’s employees, customers and vendors – leads to the business going into decline and eventually folding. It’s a good story but does it hold true?

Statistically only 30% of family owned businesses successfully make it through to the second generation of family owners – the numbers for third and fourth generation are 12% and 3% respectively (Family Business Alliance. Retrieved June 2014), meaning that during each round of ownership there is between a 60 and 75% rate of attrition.

So why are the follow-on generations of family owned companies so likely to screw it up? Surely it’s far easier to keep a business successful, once it’s up and running, than it is to start one from the ground up?

I have given this issue some thought and looked at the research and here are my “brain droppings”.

  • Attitude to risk – The first generation entrepreneur (Grandpa) was, by nature, probably a bit of a risk taker. His stakes were small and his potential gains a lot larger. It also helped that it was actually his money to win or lose. The second, third and fourth generations have inherited a legacy, so even if their risk propensity is similar to Grandpa’s they have a lot more at stake, as well as the added weight of not wanting to be known as “the generation that screwed it up”.
  • Ability to cast Vision – Grandpa was probably a bit of a Visionary too. It takes courage to start a business, but it takes Vision to grow it into something worthwhile. Chances are that the following generations were not Visionaries, but even if they were, unless they joined the company and went straight in to the position of President it’s unlikely they ever had the chance to give legs to any of their visions. If they were real visionaries they would have become frustrated, left and are probably now running their own successful businesses.
  • Perspective –  I can almost guarantee that Grandpa didn’t start his own business straight out of school. He probably learned his trade working for two or three other people before he struck out on his own (and the reason he went on his own was because he didn’t like the way the other guy did it). Family members have often never had a job other than with the family firm, and therefore have no perspective of the fact that there are “other ways” to do things. This dynamic also leads to a lack of general challenge in the business and an acceptance of the status quo.
  • Core Values – Different people have different Core Values. Grandpa had really strong Core Values – that’s why he was so successful. Those values were recognized and accepted by employees, customers and vendors. If you begin to change those values, you need to be prepared to lose at least a portion of those 3 stakeholder groups.
  • Passion – This is possibly the biggest one. Grandpa built the business on pure passion. The reason he worked those hours and made those sacrifices was because he had something burning inside him. That thing was passion. When Dad took over the business he felt the weight of the legacy and he ran the business out of a sense of duty. Now Junior is running the show, but he’s not really sure why. He’d actually prefer not to be running it. He wanted to be a teacher, but hey, it’s the family business and he has an obligation, right?
  • Networks – Although Grandpa built his business on great products and great service, I can almost guarantee that he was also a charismatic guy who had an extensive network of people that didn’t just know him, but admired and respected him. That network took time to find, build and nurture. The following generations need to understand that running a successful business is about relationships – with staff, vendors and customers. They all want to feel special, and that takes both intentionality and time.

So why does any of this matter? The truth of it is that the value of the family businesses that have already, or soon will transfer, from the Baby Boom generation to the Gen X, Millenial or in some cases Gen Z generation is $10 trillion ($10,000,000,000,000). That’s over half of the annual GDP of the USA. Not only is that a staggeringly large amount of money, but those companies also represents 62% of all US employment – that’s 77 million people. The bottom line is that family businesses are the backbone of the US economy and if things go wrong for them the knock on effects to the country at large are potentially huge.

So how can we make sure that “Junior” doesn’t flush the family legacy down the toilet?

  • Outside Employment – One of the best things you can do is to make sure that the upcoming generation get real life employment exposure to other businesses. Time and again, when I ask why something happens the way it does in a family business, I hear “It’s always been like that”. No one ever questions why, no challenge takes place and subsequently, very little progress is made. Working outside of the family business for a time not only brings new and different ideas, but also teaches perspective and challenge.
  • Learn about people – Too many of the incoming generation view the business as a machine that can be run from an office, where you just need to tweak the inputs to get better outputs. The truth is that relationships – with staff, customers and vendors – are vitally important, and you ignore them at your peril. The reputation that grandpa and dad built over 30 or 50 years can be destroyed in one or two years if junior doesn’t recognize and value the people that made the company what it is today.
  • Teach them the value of good advice – Proverbs 11:14 says “Where there is no counsel the people fall, but there is great wisdom in the counsel of many”. As a professional coach I guess you’d expect me to recommend having advisors, but there is a good reason publicly traded companies and nonprofits are required to have boards of directors. Boards offer you the opportunity to engage with a group of experienced professionals regarding the issues facing your company on a routine basis.You also get their perspective on the performance and outlook for your company and its industry – all at a nominal cost. Another advantage of advisors that is often overlooked, is their ability to leverage the networks they are grafted into. You wouldn’t believe how often I’m asked to recommend bookkeepers, insurers, CPA’s, attorneys or IT companies by my clients – why am I asked? Because they trust me!

Part of the reason I have been considering these issues recently is because I have four children of my own, the youngest of whom is 19 and the oldest 30. I’d like to think that at the time I’m ready to retire – which is still some way off – one of them might want to take over from me. So what do I need to do to prepare them for a potential transition? The truth is it’s very easy for me to give you good advice – it’s not so easy for me to take it myself, so I guess I’ll keep you updated on progress over the next few months!

If you have any issues, challenges or opportunities in your business that would benefit from being shared with experienced advisors, please don’t hesitate to give Jager Consulting a call on (440) 385-6737