Families grow geometrically. As grandparents welcome their growing family and often dote on the grandchildren, most do not give thought to what the expanding brood means to their family business. Mom and Dad may have had two children for a total of four in the family. As those children marry and possibly have two children each, there are now eight including the third generation and a total of 10 family members to support. As you continue out in future generations, the growth of the family would be hard for one business to continue to support.
What is the growth rate of your company? Smaller companies can have explosive growth rates but the challenge is finding new paths for growth as companies mature and age and the environment often changes. Niches you may have discovered and exploited are no longer as profitable or technology is forcing change, closing gaps and evening the playing field. (For more from this author, see: The Importance of Small Business Forecasting.)
If you have not invested in upgrades, research and new technology, your company may be facing more challenges from competitors. The internet and behemoths like Amazon can change the nature of an industry and make it harder to continue to operate with the margins your business may have enjoyed in the past.
Even if your business is going great guns, with fabulous margins and a robust outlook for the future, generating enough income to provide the standard of living to which the family has become accustomed can be a huge challenge. Knowing what your growth rate is and having future projections is the first step of analysis.
Wealth Creation in Each Generation
Family business owners need to think through these issues and plan ahead. The earlier one starts, the better. Setting clear expectations for the future generations that wealth generation is expected and a secure job in the family business is not always a given lays the foundation for good governance. Thinking forward about what happens in the case of divorce, step-children, adopted children, who opts not to be in the business but expects to receive some financial benefit and who can be financed to start their own enterprise are examples of the many issues on which a family business consultant can help to provide guidance.
The failure rate from generation one to two is 70% and increases to 88% for generation three. According to research, the number one reason is lack of communication and trust followed by a lack of preparedness for the next generation to lead. Some of this is the fault of the founder as he or she is set in their ways and all too often has too little documented and clearly outlined on the subtleties of running the business. (For more from this author, see: Why Your Family Business Needs a Succession Plan.)
Working with families, our consultants witness so many potential quagmires which have not been addressed. There are a plethora of reasons including the fact that running a business is a fulltime job and leaves little time for issues outside of the founder’s expertise. Sometimes it is the fact that the parents do not wish to address some of the underlying potential for conflict between siblings or generations.
In our day to day life consulting with family-owned and closely-held companies, we have witnessed a wide array of situations which could either drag on the businesses performance or set up a struggle for control. From siblings with mental illnesses, to siblings supporting their new partner’s children from a prior relationship, to specific assets being left to inherit by one child but borrowing on that asset making it worth less, to lists of investors in buildings recorded by hand in a native language which none of the children speak or read, we see a huge range of issues which if not addressed in advance can become catastrophes for the family business.
Adopting good governance measures, working with a consultant with experience in this area, integrating estate planning for the patriarch and matriarch, planning out future growth areas, encouraging children and grandchildren to explore growth opportunities but with limits in terms of risk and capital deployed, are all issues a family business should consider.
No Quick Fixes
There is never a good time to pause and execute these strategies. Most of the time, the “fixes” are not quick, simple or easy. Difficult issues and communicating between generations is necessary and often a professional can help to keep these civil and on track. The longer the lead time, the less emotional the family members tend to be as time is on their side. Lead time allows for implementation without rushing into agreements and the ability to execute in gradual steps while maintaining a focus on the business and its growth rate.
The key is to look forward and think about the future. Determine what your growth rate is presently and where you see the future trends. We encourage folks to climb up in their virtual helicopter and take an unemotional view from 30,000 feet of their business, the potential for growth and their family structure, skill sets of the children and grandchildren. This can help to plan out the patriarch’s vision while including the next generation in those plans so there are no surprises. (For related reading from this author, see: Keep the Family Business Going With a Succession Plan.)