Only 12% of family businesses survive into a third generation and a mere 3% make it to the fourth, according to the Family Business Institute.
Your family business might be in its infancy, deep into its first generation, or perhaps it is one of the 30% that remain active into its second generation. Regardless, as time goes on, the likelihood that the family business you’ve worked so hard to build and maintain will continue diminishes significantly.
Family businesses play a critical role in the global economy; some of the world’s most successful businesses have been passed down in families from generation-to-generation. A surprising 80% of the companies in the world are family-run; in the U.S., family businesses employ 60% of the workers and generate 78% of new jobs. (Source: Harvard Business Review.) A good number of these businesses are large and successful, and a handful have lasted for hundreds and hundreds of years.
What’s the secret to family-run business sustainability across generations? How does a family business not just survive but thrive in today’s complex, global economy? The first step is researching and studying the characteristics of the family companies that have had success across generations.
The lessons learned by other family businesses could be invaluable to your own company’s succession.
Establishing Processes Over Time
Family-led organizations that survive for five years, a decade, or more all reach a tipping point eventually where process must be established and implemented.
Broadly speaking, family businesses that thrive and succeed across generations are good at balancing the intimacy and attentiveness characteristic of a family-run organization with standard operating procedures and codified processes.
To grow, family businesses need talent from outside the family; the business needs to ensure there is a fair, repeatable process and fair policies in place to attract and retain the talent required for success.
A family business cannot have long-term success if it is solely guided by the whims and caprices of the matriarch, patriarch, or next generation leadership. If word-of-mouth sales and marketing never calcifies into a sales and marketing process and strategy, success is harder to repeat, outside talent will get lost, and competitors with processes will capture more of the market. If there is no governance in place to offset the appearance of nepotism and unilateral decision-making by family members, longevity is much more difficult. These are just a few examples of how a lack of process and formal strategic infrastructure put family-run businesses at risk of extinction.
Planning Succession Strategically
Family-run companies that survive across generations embrace long-term, intentional, and strategic succession planning. At these companies, choosing the next company leader is so critical to future success that it merits deep, thoughtful, and, yes, perpetual planning. Succession is a process at long-lived family businesses, and it is a process that never ends.
Strong succession planning at family businesses that have sustained longevity means:
- Establishing a formal succession planning process
- Assigning responsibility and accountability for succession planning to a specific team
- Understanding that succession is a long-term, perpetual process that requires steady, consistent work
“The most important goal in running the family business is to hand over the business. You don’t own it. You’re just watching it, guarding it, nurturing it, to hand it over to the next generation in as good a condition as possible,” stated George Riedel, owner of Riedel Glas. (EY Family Business Yearbook, 2014.)
Process is key to avoid poor succession choices and to eliminate the perception among non-family employees that the next leader is only getting the position because of family connections. Non-family talent must have confidence that the established succession process will produce a competent, well-trained leader, who also happens to be a family member.
Long-running family-run businesses have codified governance mechanisms in place, namely a board of directors to which the organization is accountable. Family members always hold board seats, but the most successful family business boards are a mix of family and non-family members.
Again, family businesses have to bring in external talent at all levels to succeed long-term. If there are no mechanisms in place to counter the perception of possible nepotism, favoritism, and other family-related challenges, perceived or real, attracting and retaining talent will be a challenge. Potential individual contributor and executive hires need to feel that there is a balance between family influence and outsider objectivity.
“We have a supervisory board, and each branch of the family tree is allowed to send one member, unless the branch already has a member as part of management. For every family member on the board, one external, non-family member is also nominated,” according to the CEO of an American maker of high-performance materials via the Harvard Business Review.
One can think of this as a “separation of powers,” where one branch has the ability to check the other, creating the perception of fairness and accountability that will be attractive to potential hires. It also builds a sense of fairness among family members.
Even smaller family-owned and -operated businesses can benefit from creating an advisory board representing a mix of family and non-family members. Whether a family business has 200 employees or 15, the benefits of stronger process and governance are the same.
Leveraging the Family Brand
Family businesses that have succeeded across generations know how to leverage the family-run brand to their advantage. Family-run or family-owned and -operated businesses—even just family member-led organizations—tend to be trusted more by customers, clients, and consumers.
This inherent audience trust must be maintained, however; keeping this trust comes down to cohesion and brand unity across the organization. Lack of process and an absence of governance within a family-run organization will eventually erode this trust, as the internal discord that will result will flow out into the market in time, damaging the brand.
“Vibrant family businesses around the world know the limitless value of connecting their families to their stakeholders in messaging and all elements of image,” stated Joe Astrachan, Professor of Management and Entrepreneurship, Kennesaw State University. (EY.)
Family-run businesses tend to start from a position of strength when it comes to audience perception of their brand, benefiting to some degree from a long-standing affinity for the tradition of “mom-and-pop” authenticity and honesty. Family business that have survived across generations understand that this “mom-and-pop” trust is a valuable differentiator and they have invested in the process and governance infrastructure to preserve it.
Executing a Generational Mindset
Businesses run by families that have lasted generations are always thinking long-term. The family-leader of these businesses put generational survival over short-term success, near-term profitability, and immediate personal returns. Shepherding the business toward long-term viability trumps most other concerns, which tends to make these businesses less profitable than non-family-owned organizations in boom times and more resilient in down economies.
According to “What You Can Learn from Family Business” by Nicolas Kachaner, George Stalk, Jr., and Alain Bloch, “The simple conclusion we reached is that family businesses focus on resilience more than performance. They forgo the excess returns available during good times in order to increase their odds of survival during bad times. A CEO of a family-controlled firm may have financial incentives similar to those of chief executives of non-family firms, but the familial obligation he or she feels will lead to very different strategic choices. Executives of family businesses often invest with a 10- or 20-year horizon, concentrating on what they can do now to benefit the next generation. They also tend to manage their downside more than their upside, in contrast with most CEOs, who try to make their mark through outperformance.”
Kachaner, Stalk, Jr., and Bloch point to the following approaches as indicative of this resilience:
- These family-run companies are financially conservative in good times and tough times
- These companies tend to invest in capital projects that they can afford and are more likely to produce stronger returns
- Family companies maintain a strong link between debt and loss of autonomy and therefore try to stay debt free
- Family-run businesses tend to retain talent and have lower turnover rates, maintaining continuity, saving money, and preserving the family-run brand and company culture
Small, mid-size and larger businesses started and run by families can learn valuable lessons by looking at similar businesses that have lasted for generations. Establishing process, committing to ongoing succession planning, building out balanced governance boards, protecting a brand’s “mom-and-pop” identity, and remaining resilient are five characterisics of family-run business long-term success.
Forbes’ writer Dennis Jaffe, in his article, “What Can All Businesses Learn from Family Businesses” perhaps captured the family-run business mystique best when he wrote: “As such, family ownership differs from unrelated owners focused primarily on maximizing present profit. The difference lies in the present generation of owners’ connection to the past and the future. A member of the Hermes family perhaps put it best: ‘You don’t inherit a family business; you borrow it from your grandchildren.’”
Establishing process, governance and intentional, strategic marketing, sales and operational structures does not mean a loss of control for family-run businesses. In fact, it is the best path forward to ensure your family’s legacy survives for generations to come.