We all know about the third-generation wall, but why does it happen? Lisë Stewart of the Galliard Group and Steve Barnhart, IMEC, writing for the Southern Business Journal, looks at the three most common causes of transition failure and what to do about them.

Many people are surprised to discover that while family-owned businesses make up 95 percent of all businesses in the United States, less than 40 percent have survived the transition to the second generation and a paltry 15 percent to the third.

Why do so many families struggle to leverage the entrepreneurial spirit so evident in a first generation business? The three most common causes are a lack of thoughtful planning, uninformed decision-making and mismanaged communication within the family.

First, few family-owned businesses realize the importance of a family business transition plan, compared with strategic plans, marketing plans and financial plans which are considered essential for their business. Yet the family business needs a well thought out ‘road map” for negotiating the problems that are inherent in the naturally evolving family unit. In their excellent book, “Strategic Planning for the Family Business,” Randel S. Carlock and John L. Ward recommend the family transition plan should include:

  • A family vision and statement of commitment;
  • A list of business values and family values;
  • Policy and protocol concerning governance — including the role of the board and the family.

 

A Family Mission

One of the big advantages of developing a transition plan is that merely having the discussion can help avoid some of the most common problems associated with a transition phase, including confusion over the role of the retiring family members, disagreements about how the company will be managed and conflicting roles between new generation management and previous generation management.

However, it is rare for families to come together and discuss these issues. Most families believe as long as the business is successful, somehow these problems will take care of themselves. The reality is that the business may well fail to be successful as long as these issues remain unresolved.

Secondly, a family needs to ensure decisions made — particularly regarding the development of estate plans, trusts, distributions, reinvestment, etc. — are based on sound legal and financial advice. Not all lawyers understand the intricacies of estate planning in the context of the family business. Not all accountants understand the implications and benefits of the variety of legal options, such as G-DOT or GRAT trusts. Be sure the expertise you use knows about business, tax laws, estate planning, insurance and financial planning. Look for “one-stop shop” assistance — organizations that can provide a variety of integrated services through the coordination of several different experts. Some major insurance companies offer this integrated service, as do some “boutique” family law firms. However, be cautious when purchasing services and avoid those firms that seem more intent on pushing a particular line of products. Instead, look for a firm that acts as a consultant — one that really understands your family’s needs and offers a range of solutions for you and your family to consider.

Finally, develop both the skills and the common sense practices that enable honest, constructive communication to take place within the family. Two of the most common communication problems that arise are:

l Failure to recognize that early family patterns of communication will be carried into the business setting — consciously or not. This may manifest itself in a range of inappropriate behaviors that stem from early life experiences such as a deep-seated sense of competition between brothers, a younger sibling that feels he or she must constantly prove themselves to older family members, teasing and one-upmanship or bitter attacks that would never occur if the parties involved were not related.

l The failure to communicate is honestly out of fear of creating conflict in the family. For example, if we hire a non-family employee who does not perform well on the job, we are likely to follow company policy and terminate their employment. However, if that employee is a younger brother or a sister-in-law, we will often fail to respond appropriately. We might harbor negative feelings, talk to other family members and let our anger and resentment grow.

Problems such as these can be avoided if a family company has a set of agreed practices that are understood and utilized by all employees, whether they are family or not. However, these procedures of giving feedback and acting in accordance with company policy must be utilized through fair and ethical practices. Each of the employees — family members and non-family members, managers and line staff — must all know what is considered good performance, must be clear about expectations and must be given the coaching and resources necessary to perform well in the job. This is just good business practice — whether or not it is a family-owned business.

Few family-owned businesses, particularly those that are home-grown — where everything has been learned on the job with few outside influences — have developed the range of sophisticated management tools that smooth the transition process. These tools include a clear set of roles and responsibilities — particularly for senior managers — and an effective performance management program, including performance expectations for each job function, opportunities for constructive feedback, mentoring and coaching and ways to recognize and reinforce behavior.

In addition, many family-owned businesses would do well to make use of an advisory board. It would expand their knowledge base, critically examine family decision-making and add depth to the quality of coaching and mentoring for senior managers — particularly new generation managers.

All of these practices are of value to well-run, smart companies, family businesses or not. They typically have a commitment to planned growth, wise re-investment in the future stability and profitability of the organization and leaving a legacy for future generations. However, family businesses have the added benefit and challenge of a rich history of relationships and in-depth knowledge. Well managed, a family owned business can be a source of pride, income, inspiration and healthy interdependence — a true legacy for generations to come.

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