How to keep your family business alive, prospering and-most importantly-in the family

By Christopher Freeburn

Entrepreneurs who have invested years of time, dedication, and resources into building a business often want to see that enterprise live on as a family asset even after they step aside from the actual operation of the company. Many hope to see their new business become something that each new generation of their family can inherit, passing the business from themselves to the children and grand children and beyond.


Unfortunately for these ambitions, the track record of family businesses is not good. "Keeping a family business alive is perhaps the toughest management job on Earth," says John L. Ward, author of Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability and Family Leadership. "Only thirteen percent of successful family businesses last through the third generation. Less than two thirds survive the second generation," he adds, noting*, "Only five percent of all businesses ever started actually become family businesses through the appointment of a successor from the next generation."*


Many family business fail to remain under the control of the originating family because of changing market conditions, financial difficulties, or disinterest by succeeding generations. Most, however, fail to pass from one generation to another simply because the original business owner failed to plan for the smooth transition of ownership and management to successive generations.


The Necessity of Planning
The first step toward making sure that your business stays in your family after you step down is to develop a clear, well-considered succession plan that clearly defines who owns the company and who will run it once you leave. In fact, you should have a succession plan in place long before you consider stepping aside. Without planning, the business and family can be thrown into confusion or rancorous dispute in the event of a sudden and unexpected change in company leadership.

One reason many small business owners neglect succession planning is the emotional issues that such planning raises. Making succession decisions requires the business owner to choose who should get control or ownership of the business in the future. This requires taking a levelheaded view of the available family members to determine who among them has the requisite skills and temperament to manage the business, and who does not. Difficult questions have to be raised and answered: Who will run the business? How will the ownership of the business be distributed? Which family members will not be included in the business's management and ownership? The answers to these questions are sure to provoke some measure of hurt feelings among family members, since not every one can be the CEO.

Further complicating the planning process are the divergent interests of various family members. Not every family member may be interested in joining the business. "The natural desire of a child to steer a course independent of his or her parents can also nip succession plans in the bud," says Ward. A family business can also magnify family issues because the separation between family life and the workplace is thin or non-existent. "Human emotions such as pride or jealousy may become enlarged when work and home are intertwined," warns Ward. There may be disagreement among family members about the distribution of ownership or responsibility in the company. "These are emotionally trying issues for all concerned. As a result, many families abandon the effort at succession because they fear it will destroy the family," Ward says.

Nevertheless, proper planning is the only way a family can assure that a business remains in its hands over the long term. The sooner such planning is undertaken, the better. Succession planning should incorporate a variety of scenarios including potentially disinterested heirs, or a lack of viable family managers in succeeding generations. Putting together a plan in advance will help family members confront these issues as they arise in future years.

In order to increase the chances of your family retaining control of the business, your succession plan should incorporate things that combine family and business activities. For instance, creating a business-training program that offers young family members internship-like positions at the business during their school-age years is a good way to orient them toward participating in the business as they mature.


Family problems
"Many family businesses find that the family itself becomes a stumbling block," says Ward. "In later years, the family's growing financial demands tempt the owners to harvest the company's profits rather than reinvest them in additional growth." Over time, a family can come to see a business as merely an asset, rather than a place where they wish to continue working. In such cases, succeeding generations are often tempted to sell the business for an immediate profit to a non-related third party. This is the fate of many family-owned businesses.


Running a business can often exacerbate interpersonal pressures that already exist within the family.


"The rigors of business also sharpen such typical family problems as sibling rivalry or competition between generations," says Ward. Hurt feelings and ruined relationships can result from decisions made in the business, especially those involving which family members have what responsibilities at the firm. To some extent, there is almost no way to completely mitigate the fallout among family members from business decisions, since there is rarely a way to please everyone.


In the end, constructing a clearly defined succession plan as well as management structures and policies that have been spelled out beforehand will go a long way to reducing the natural friction that running a family business can generate.