By Guest commentary Friday, May 20th, 2022

By Keanon Alderson

In the United States, approximately 80% to 90% of all firms are either owned or controlled by families. These firms contribute significantly to the economy and are a significant source of employment and innovation. When they are healthy, there are numerous positives, such as increased financial success, longer life of the firm, and massive consumer trust. This article will discuss the challenges and present solutions to several common family business issues.

SUCCESSION

Succession is by far the most serious issue for family firms. Succession means a transfer of leadership and ownership to the next generation. The statistics are not good; there is a successful succession from the first generation to the second generation only 30% of the time. It is 10%-15% from the second to the third generation, and only 4% for the third to the fourth generation.

A successful succession is vitally important if the family is to pass on its wealth and the business to future generations of family members.

Succession is not a one-time event. Instead, it needs to be a long-term process where the successor is identified, selected, and developed over many years. Research shows a higher likelihood of bankruptcy from a failed succession than from competitors or the economy! Of family firm bankruptcies and failures, 77% occur after the founder’s death.

Many family business advisors suggest a future successor go to college, find a job on their own, get promoted, learn new skills and techniques, and then come back and join the family business. It is ideal if the successor can work for a supplier, a customer, or a company in the industry.

COMMUNICATION

Communication among family members can sometimes be a challenge and not very effective. The family should meet regularly and discuss issues and opportunities to have complete and transparent communication.

When the family leader is presented with diverse views on a subject, decision-making is improved, and harmony in the family is maintained. When people can express their views, they are more likely to support the eventual decision.

DECISION-MAKING

Decision-making is extremely important for any business. There is often an influential stockholder in a family business who makes most of the decisions; commonly, this is the founder.

When the company is small, it’s often necessary for the founders to make all the decisions. They are the expert at what they do. This can become a liability as the company grows larger and has numerous employees and family members. How the company did things in the past may often not be the correct way now.

I hear comments that the incumbent generation sees no need for social media or even a website. They exclaim, “this is how we have always done it.” This is where the next generation can be valuable. The answer to decision-making effectiveness is to involve others and hear differing views and new ideas.

CONFLICT

Family-owned firms often try to avoid conflict for family harmony, resulting in important ideas not being considered. A better decision will result with increased communication and intense discussion.
When family members debate and present differing views and opinions, that is positive.

However, when conflict turns personal, it becomes dysfunctional and destructive. Professional counseling may be needed with sibling rivalry, as the root cause may go back years into the past.
If open communication is present, there is hope. If people are not talking, it becomes dysfunctional and negatively affects the business.

PLANS

Many family businesses do not have a formal plan for strategy or succession. The company is often run on a day-to-day basis and is constantly “putting out fires.” This is not acting proactively. Competitors will have the advantage if a company is reactive.

The family should write a strategic plan that looks a few years into the future. They should consider the next generation and how they can enter the business to ensure a smooth and effective transition.

SOLUTIONS

The tools of proper family and business governance are the answer to many of the issues family firms face. Having family meetings, a family council, a family constitution, and a board of advisers can prevent common family issues, professionalize the family business, make the business more productive, and set it up for future success. Family business advisors can help institute these tools.

I was in my family’s business for 17 years. I wish we knew of these tools and solutions to make it more successful, and possibly we would have made it past the second generation!

• Keanon Alderson, Ph.D., is a professor at California Baptist University in Riverside and is the director of the Family Business Center. He is a family business researcher, author, speaker, and advisor. He has written two books, Understanding the Family Business and Family Business Governance, and can be reached at [email protected].