“Shirtsleeves to shirtsleeves in three generations” describes how too many family businesses transition from start-up to tear down by the time the founder’s grandchildren are ready to move into the corner office.
According to data cited by The Harvard Business Review, 70% of US family-owned businesses fail or are sold before the second generation can take charge. Only 10% remain active businesses for the third generation to lead.
Although these numbers are discouraging, it doesn’t mean your family business is doomed to become just another statistic. While every family business is unique, following are a few familiar trouble spots:
Heirs are financially illiterate. Consider, for example, a string of family-owned auto dealerships. A passion for cars among succeeding generations must be joined by a passion for balance sheets and income statements. Knowledge regarding factoring and floor plans is as important as an affinity for transmissions and suspensions.
Family takes precedence over competence. Just as all founders do not make great chief executives, all sons and daughters do not belong in the corner office. What’s more, no heirs should receive a free pass into the family business.
Infighting. It is tough enough for brothers, sisters, and cousins to get along inside a family business. Add spouses and children to the mix, and it easy to see how a family business can be torn apart. An outside advisor, with no vested interest or horse in the race, can help to develop a succession plan.
Lack of mission. It is easy to lose your way if you don’t have a goal. This is true of individuals and entities. An outside advisor can help a family develop its mission statement.
As a Mergers & Acquisitions (M&A) specialist, I have advised many families who wish to either grow or sell their business. Before even considering a sale, a family business must submit to a full set of diagnostics. Personnel, property, compliance, regulatory, product, insurance, equipment, technology, client and so many other factors must be carefully analyzed. Lurking compliance issues, for example, can significantly discount the value of an otherwise healthy business. Disruptive technology could turn a thriving business into an anachronism virtually overnight.
Potentially divisive questions regarding family must also be considered. Let’s consider a succession scenario in which two brothers founded a business. What if one brother’s daughter envisions a future for herself in the business, while the other brother’s daughter would like to sell the business and use the cash proceeds for her own new business? Both parties will need to work towards a compromise.
A range of family issues including divorce, death, addiction, strife and shifting goals can loom large when considering next steps for a family business. The simple fact families multiply with succeeding generations presents a challenge. Can a family business that supported one family in high style support all the families of the founder’s children? If not, can it be grown to the necessary scale? If so, a business plan must be created.
Tangibles and intangibles required to start and grow a family business are different than those required to sell a business. Courage, vision, drive, market intelligence, process know-how, and product knowledge are essential when starting and growing a business. A different skill set is required when selling a business.
M&A specialists can offer significant value. What the owner of a family business is probably experiencing for the first time, a trained M&A specialist has done hundreds of times. He or she will know what to do, how to do it and when to do it.
Begin by establishing a trusting relationship with an M&A specialist, whatever your plans for your family business. As in all aspects of your business life, it is never too soon to start planning ahead.
CAS oversees and executes on M&A engagements, investment opportunities, compliance/regulatory assessments, valuation and expert witness litigation matters for constituents of the Outsourced Business Services (OBS) sector.