Is your Business Ready for the Next Generation?

Part One. Why should these survey results lead us to conclude that family-owned businesses are in trouble? 

• According to a 2010 research report on family business issued by the University of Vermont Business School, the average lifespan of a US family-owned business is 24 years.
• Business Week reported a year later that 40% of family-owned businesses become second-generation businesses, while 13% pass to a third generation and 3% to a fourth.
• In the Jan-2012 Harvard Business Review the journal reported 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over, while 10% remain privately held companies for the third generation to lead.

First, the 24-year average business lifespan actually sounds impressive, given the acceleration of change business owners have had to deal with over the past several decades. Say the founders were age 25-35, twenty-four years is about when they could seriously consider their children taking over the business, and according to these stats 40% achieve that goal.

Are we supposed to conclude the other 60% missed the family business boat? Maybe they sold their companies to outsiders for admirable multiples and started something new. Maybe they sold to the management team with a note that is funding their retirement. Maybe their kids found successful careers on their own while the founders were financially successful enough outside the business to retire comfortably.

Similarly, are the 87% that failed to make it to the third generation evidence of second generation failure? Maybe G2 developed the business so successfully they sold to the highest bidder. Maybe they went public. Finally, what can we make of this number 70%—family businesses that failed to give the second generation a chance?

Sure, many might have folded in the first few years, but from the other data we know 20% of those businesses survived beyond the average 24 years giving them plenty of time to consider family ownership transfer.

Statistics that downgrade the success of American privately owned businesses sound slick at best—self-serving if they come from consulting institutions who have a stake in solving the “problem”. Here’s an idea. Compare the founder longevity statistics to public company CEOs, whose average tenure is six years! Now that’s failure.

Part Two. Who really cares why so few so few business reach G4?

Keep your attention getting your business ready for G2. Here are some ideas.

1. Give Newton’s First Law of Motion a business twist.

Let’s say Isaac Newton concluded that, “A business at rest will remain at rest unless acted on by an unbalanced force. A business in motion continues in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”

Don’t you feel surrounded by “unbalanced forces”—not just acting on you but relentlessly forcing you to adapt. New technologies, new marketing strategies, new distribution models, new regulatory pressures, consumer trends, employee trends, compensation trends, global competition trends—unbalanced forces never leave you alone.

How does this law affect founders bringing successors into the business? The founder-successor is a game-changer force and totally unbalanced. Welcome it, because without unbalanced forces, business physics says you either stay at rest (death) or forever move in the same direction at the same speed (dying). When you bring G2 into your business, you bring fresh eyes and an adaptor mindset.

Most owners choose between two training models—sink-or-swim versus when-I-say-you’re-ready. Both are bad. Do you really want a clone who repeats your mistakes? Do you really want a dependent you do all the thinking for?

You want someone who understands the why-how-what that got the business to where it is today, someone who respects the customer desires that drive the company’s mission and the people and knowledge and skills that execute that mission, and most of all someone always thinking what-if. Not an entrepreneur necessarily—but someone who can master and even break Newton’s law.

2. Founder and Successor are not job titles.

“Founder” is historical. It already happened. It can’t happen twice in the same company. It’s great to have the title because it starts the story of the company from the garage to the corner office, from a few loyal employees to a large employee family to a thriving company culture, and from a few willing customers to international markets.

But the ending of the story requires a different description. Most CEOs would be thrilled to wind down their careers working half time at full salary and perks. They want to do everything they love about the job but pass along all the monotony and grief. Sounds well-deserved, but it’s just not productive or fair. The company needs more CEO energy not less to prepare for the future.

The right role is Ambassador, building profitable relationships and networks, promoting the company brand and enhancing its reputation. That may be full time work, but it qualifies as what most CEOs like about being CEOs. It is also a role critical to the launch of next-generation ownership.

Meanwhile, “Successor” hardly describes the expectations for next-generation ownership on either side. It implies someone who will placidly continue the policies of past leaders or someone eager to put his own stamp on everything. Companies run by clones or rebels are throwing away a great opportunity. Not should company founders even wish for entrepreneurial passion from successors. The passion to value is adaptability—recognizing and responding to the challenges presented by an evolving business world. Successors should be Developers building on the strengths of the company and the shortcomings of competitors. They honor the past by creating the future.

3. Developers and Ambassadors have to meet on bridges.

Sometimes bridges are solid and easy to cross. Other sway over a chasm in the wind. It’s easy to pass each other by on the solid bridge. It’s hard to get together on the flimsy one. But you have to meet half way, one bridge at a time. Here are three.

Developers have to master the products, services, and processes that made the business successful. There are no shortcuts. The first generation spends most of a lifetime converting ideas into action and creating things people want to buy. The second generation has an urge to innovate out of old school ways. Both sides have to appreciate the other’s thinking and respect equally past results and future potential.

Ambassadors have to share control long before turning over control. Leadership is teachable, but hard to impart without experiencing it directly, so give Developers projects that call for the real thing. Developers must develop soft eyes keeping keen awareness on the surrounding context of every issue while examining the facts right in front of them. The need to understand the shortcomings of fear and loyalty as motivators and dig deeper to achieve persuasion. They need to take small but significant risks, with resolve but without having to explain along the way.

Developers and Ambassadors alike are required to surrender their baggage before stepping on the bridge. Of course there will be misunderstandings and conflicts throughout the transition. Only, make sure they aren’t simply kneejerk reactions from family issues that need closure. And not misguided assumptions and preconceptions of two generations getting in the way of one-to-one communication.

To contact W. P.:

W. P. Richardson
Texas Financial Partners, Founder
P: 817.259.9030