Any succession in a family business can be difficult. But in my experience—and literature on the subject supports what I’ve observed—the transition between the second and third generation of a family business is by far the most difficult. While there are numerous studies citing various percentages of family business survival over generations, most if not all agree that as time goes on, the transition becomes more difficult, and many family businesses sell or fail. But why?
There are a variety of reasons that family businesses struggle to make it to the third generation. Some of them are unique to the family business in question. But there are some themes that I’ve witnessed over the years. My observations generally apply to the Greatest Generation—Baby Boomer—Gen X time frame, but these observations could be applied to any timeline.
(Wildly) Different Upbringings
In the first generation of the family business, the founder more of than not came from nothing and started with nothing. The business, essentially, was born from necessity and built by the kind of grit and determination that come from being uncomfortable. The second generation (and especially the third) often grow up in a much more comfortable environment, wanting for less than their parents, which can take the competitive edge off a bit. This isn’t always the case of course, but there are plenty of examples where it is.
The Generational Divide
It’s a tale as old as time. Every generation has their own views on life, business and society—which can harden over time. Case in point, at one time, the Beatles were considered subversive. And on and on it goes. When it comes to the family business, the divide rears its head around the “how” of the business. The third generation will want to put their stamp on the business and move it into “the future” while the outgoing generation takes the “if it ain’t broke” view. This predictably leads to a clash, hamstringing (and sometimes destroying) the succession.
The Growing Family Tree
As the business passes from first generation to second to third, the family tree has grown. There are now parents, uncles, sisters and cousins involved. The incentives and issues grow along with the family tree, and instead of dealing with a handful of parent-child issues, there are now too many competing variables to manage.
So, are we doomed?
If you are involved in a family business succession and reading this, don’t be discouraged. Despite the oft-cited studies of imminent failure (and the very real complications I listed above), plenty of family businesses succeed far beyond the third generation. Kongo Gumi, a family run Japanese construction firm, was founded in 578 AD and is still in operation. That’s nearly 1500(!) years. With the right approach, and some basic principles, your family business can thrive long after you are gone. Here are the keys:
Empowerment
In his article NextGens Stepping Up as “NowGens” in a Family Business, author Jeremy S. Lurey emphasizes the importance of letting the next generation step out of the child role and into a leadership role. The responsibility here falls to both generations—the child needs to step up and the parent needs to empower them to do so. The next gen must become a leader before becoming the leader.
Open-Mindedness
The sticking points in those generational divides must become less sticky. Again, both generations are responsible for bridging the divide, and that begins with having a truly open mind. In almost every case that I’ve come across, both generations have good ideas that will likely help the business succeed. Negotiating the right mix can take time, but with an open mind, an agreement that works for all parties—and most importantly, the health of the business—can be reached.
Everyone Comes to the Table
When there are multiple family stakeholders involved, there are a lot of considerations. Who will work in the business? What level of financial stake does everyone have? Who is best fit for which role? Everyone must come to the table with their wants and desires and make them clear to everyone else. Once the stakes are laid down and the issues are clear, the solution will come more easily.
Communicate & Measure
If you’ve ever read any of my articles, you know that consistent communication is the Rosetta Stone of the family business succession process. I require that my clients meet with each other weekly throughout a transition, to review business issues and measure progress through KPIs. Regular meetings allow for constant communication and progress reviews. Nothing gets solved in a day, but over time, what looked like a hopeless process can become a giant success!
