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9 Critical Reasons Why Family Businesses Fail to Successfully Transition to the Next Generation

There are many reasons that less than 40% of all family businesses in America successfully transition to the next generation. Of course, many times that is by choice. However as these 9 reasons help explain, many family businesses suffer challenges that simply can’t be overcome, even if the intent was to keep the business closely held going forward. That explains why tackling these challenges in advance with the help and guidance of family business professionals makes great sense.

  1. All too often, the key family owners are not aligned. We all can imagine what that can look like. One family member sees no need to expand while another sees expansion as the only way to remain competitive. One member wants to sell the business to the highest bidder while the other believes that the business should be passed on to the next generation.

  1. Strategic planning is in short supply regarding many, if not most, aspects of the business. The “been there, done that” mentality within some family businesses often translates to the lack of a well-thought and substantiated strategic operational, marketing or growth plan. That development can be the direct result of the lack of alignment referenced earlier.

  1. Current leadership has assumed that role even though they were not necessarily fit to do so. Some family businesses operate like a monarchy where the oldest child is next in line to assume responsibilities they may not yet be prepared for or that simply don’t align witheir personality and/or skill set. That obviously can result in a myriad of issues.

  1. Family governance never gets the attention it deserves. Family business succession planning should not begin on the verge of a necessary transition, yet all too often it does. It should take the shape of a formal ongoing process that includes the guidance and input of family business specialists whose knowledge will help them avoid the pitfalls and speed bumps that too many closely-held companies looking to transition simply never can overcome.
  1. An effective Board of Advisors / Directors was never put in place. The most forward-thinking family businesses establish a formal or informal Board that includes experienced professionals who bring an important impartial perspective to the challenges related to operational success,  long term growth and smooth generational transition. Unaligned companies often can’t agree on the importance of such a Board or on its makeup.

  1. Marriage and the introduction of in-laws change the existing dynamic…and not in a positive way. Parents and their offspring commonly differ on the way the family business should operate or the way salaries and/or profits should be disseminated. Now imagine the introduction of spouses and grandchildren into the mix. The probability of maintaining aligned values and perspectives drastically diminish.
  1. Some family members feel entitled to distributions either they have not earned or that the business is unable to distribute if it wants to still remain viable and well-funded. Many of the challenges previously outlined become exacerbated completely when the topic dujour turns to salaries, profit distribution and the importance of cost-control and reinvestment.

  1. The next generation of assumed leadership/ownership have not prepared themselves for what lies ahead. The hope, and often the expectation, in many cases is that one generation will smoothly hand the business down to the next. What happens when the next generation is willing to take over the company, but has not been willing to put in the time in advance to develop the skills and acumen needed to ensure a successful tomorrow.

  1. It is not uncommon for personal and business finances to get co-mingled. 

    Every time company cars, real estate costs, travel and other quasi-personal expenditures are paid out of the company coffers, the challenges of alignment and risk again take center stage.Although these challenges exist, the backbone of America largely remains family businesses. And the desire among many of those still is to successfully transition the business to the next generation. With the help of family business.family business succession planning consultants, that is not only possible, it remains extremely doable.