Most of us know someone who operates a family business. In fact, some of the largest, most influential corporations in America had their beginnings and still operate to some extent as a family enterprise: think Mars (the M&Ms people), engineering giant Bechtel Corporation, News Corp. (still headed by patriarch Rupert Murdoch), Koch Industries, Ford, and Wal-Mart.
But family businesses face a number of unique challenges by their very nature. At their most basic, family businesses operate simultaneously in two spheres — the family system and the business system — that can often have conflicting needs, assumptions, and purposes.
According to a recent, major report on business succession by consulting firm Deloitte, more than 80% of family business owners believe their families will retain control of the enterprise for at least the next five years. But according to research from the Family Business Institute, only 30% of family businesses actually survive into the second generation. From there, the picture becomes even more bleak: 12% survive to the third generation, and only 3% make it farther than that.
An analysis of the family system reveals that it is primarily based on love and other emotions. Acceptance within the family system is based on relationship alone and is typically unconditional. The function of the family system is to nurture and sustain self-esteem in its members so that children can grow into responsible, productive adults and older members can feel valued, respected, and cared for. A family exists to protect and care for its own.
The business system, on the other hand, operates on a different set of principles, most of which are driven by logic, economics, and performance. Acceptance is based on results, and the measurement method is objective, rational, and typically profits-driven. The overriding goal is to provide a product or service in the most efficient manner possible and to continually increase the business’s capacity to thrive. A business exists to generate revenue and sustain its operations.
Framed this way, it’s not hard to see that when business and family become commingled, there is high potential for conflict. Emotions and motivations that have their roots in familial relationships can spill over into business decision making. This is especially true when business succession planning is involved.
The Deloitte report cites three principal areas for attention when discussing leadership transitions in family businesses: 1) information; 2) communication; and 3) governance. Certainly, these are core considerations for any business, but in a family-run business, where emotions are highly involved and the consequences of shortfalls in any of these areas are high, it is especially vital to focus and plan carefully. Among the recommendations offered by the report are guidance from an outside board of directors; incorporation of a formally appointed family council into governance matters; development of separate mission and vision statements for the business and the family organization; and utilization of the expertise of a carefully selected group of outside professionals to provide day-to-day operational guidance.
Keeping it all in the family can work, but it requires thought, strategy, and above all, good advice. We work carefully with family stewards to provide independent, research-based strategies for ensuring the long-range success of the business — and the family relationships that foster it.
Stay Diversified, Stay Your Course!