Family-run businesses 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 businesses. Yet 70% of family­ run businesses don’t make it to the second generation, and a full 90% never make it to the 3^rd generation. Not new statistics, to be sure, but appalling just the same.

So why the embarrassingly high failure rate?

Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. While we are strong advocates of planning, we know that no plan will correct fundamental weaknesses in a business unless its managers recognize and address those weaknesses. So in this article we take a slightly different approach to defining what is needed. We’re going to go out on a limb and be specific about some of the problems we’ve seen that prevent many family-owned businesses from realizing (very much of) their real potential.

Please understand, we are not saying that all family-run businesses are fundamentally flawed, because they’re not. What we’ve observed, however, is that 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 far better than the 90+ percent average failure rate 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.

How can you ensure your transition is a success?

1. Treat your children in the business 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.” Incidentally, if you don’t evaluate performance for any of your employees, no need to read further, and we wish you the best.
2. Make a detailed list of the skills that are needed to succeed in your business – not just the ones you used to start the company, but the ones that will help the business 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, filling in the holes as needed.
3. Outside advisors can be priceless (no reflection on their fees intended) in this They bring a broad range of expertise and a high level of objectivity. They don’t sit around the dinner table and glare at you in the evening and they don’t own part of the company. They are the experts from across town, whose advice will have the greatest chance of being accepted as unbiased
4. Finally, consider forming an Advisory Board for your company, and populate it with advisors who can help you groom your sibling for that next step. Outside advisors can bring relevant skills that you and your existing management team may not have, and they bring the added benefit of being outsiders who are not already labeled by your son or daughter with preconceived ideas about how it should go. They can help you avoid making decisions that may not be in the best interests of the company – “Aw, let’s not push him so hard,” and they will likely be a good balance with the family members on the Board. Since you and the management team retain the decision-making power, you have nothing to lose and can only gain new benefits for you, your upcoming successor, and the company.
5. Treat your children in the business 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 those deficiencies 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 “

Want some help thinking through all this? Call us. We know our way around this stuff.

We are Your CFO for Rent.