Passing the keys
Family businesses have unique generational challenges.
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From the pages of In Business magazine.
Family business statistics have been quoted over and over again — 30% of family businesses don’t make it past the second generation; 10% to 15% make it to the third; and less than 5% typically make it beyond that. Sounds bleak, doesn’t it?
In an online article titled “Family Business Survival: Understanding the Statistics,” Craig Aronoff, Ph.D., co-founder, and principal of The Family Business Consulting Group Inc., suggests those numbers may be misconstrued. “How do we know whether a 30% ‘make it’ rate is bad, good, or just plain normal?” Aronoff asks. “What are they being compared to?”
After comparing family business success rates to that of General Electric Co., which in 1996 was 100 years old and the only original company still listed on the Dow Jones industrial average, Aronoff determined the chances of success to be similar. “Rather than bemoaning family business survival rates, we should judge them as somewhere between normal and extraordinary,” he concludes.
We spoke with several area family businesses — Reynolds Transfer & Storage, Gordon Flesch Co., Endres Manufacturing, and the former Soderholm Wholesale Foods — to get a look at their dynamics and plans for the future.
The experts weigh in
Family businesses are far from unique. Approximately 80% of all companies in the U.S. are considered family businesses and they employ 62% of the nation’s workforce, according to the University of Wisconsin–Madison Family Business Center. Its 58-member roster from around the state is down slightly from previous years, according to Director Sherry Herwig, but it’s growing again.
Herwig disagrees with some published reports suggesting family businesses are on the outs. “I think things are strong, but expectations are changing. It’s not necessarily a given that the next generation will take over a family business and some research shows a bit of a decline in family businesses that plan to pass a company to the next generation, but the reasons vary.”
In many cases, Herwig explains, millennials are the next generation. “Millennials tend to be raised with the idea that they can pretty much do anything, so they don’t feel that they have to stay on a certain path, but their desire to make a difference really plays well in family owned businesses,” she adds, citing their desire to give back and connect with the local community.
Healthy relationships and communication is key. “If the family is not doing well, it’s really hard for the business to succeed. Impacts can be minimized through legal documents, but emotions cannot be controlled.”
Neil Fauerbach, partner and director of business development and marketing at Smith & Gesteland, helps family businesses plan for longevity and success. The keys are having a solid succession plan and an ability to adapt to change and innovation along the way, he says; yet a recent PricewaterhouseCoopers survey says 73% of family businesses do not have a formal plan in place.
On any given day, Fauerbach may meet with family run companies in various stages of preparedness. Sometimes, he says, parents want to turn the business over to their kids but the children aren’t adequately prepared to run a business.
Sometimes the parents aren’t ready to relinquish the reins. “In a couple of instances, we see families trying to figure out how to get the now generation (parents) to move aside,” Fauerbach says. “Dads, in particular, often have trouble letting go, but then there are stories where dad suddenly turns the keys over and says, ‘You’re it.’”
Wrede “Bud” Smith is an attorney at DeWitt Ross & Stevens in Madison, and also part of a family business bloodline. Smith’s brother and cousin run The American Popcorn Co., producers of Jolly Time popcorn. Founded in Iowa in 1914 by his great grandfather, Smith’s brother represents the fourth generation, with more generations on the way.
“The company is still strictly family owned,” Smith reports, “and it was an easy transition from my dad and uncle, but the next transition will be harder because there are about a dozen members of the fifth generation. Who steps to the plate from that group is a bit unclear. There is interest, but interest and ability don’t always line up.”
Smith does not handle any legal work for his family’s business, but says a common challenge he sees when working with family businesses is figuring out how to treat everyone fairly. “Often the family business itself is the single largest asset of the business, so how do you pass the business onto the active child? Or do you pass it on to all children? What about the inactive child?”
Senior owners who struggle with letting go can sometimes be nudged along if they see that they will be financially secure afterward. But at times, parents are afraid to let go no matter how old their kids are. “The business is their life,” notes Smith. “They often fear they’ll lose their identity or lack confidence that the next generation will work as hard or have the passion for the business that they had.”
That can be difficult for the next generation, as well, Smith adds, “when they’ve been working in the business for decades and dad is still calling all the shots.”
Emotions can come into play when transition talks begin. Some family members may want to keep the legacy going, while others would prefer to sell. “Business can very easily get in the way of the family,” Smith warns, causing rifts that wouldn’t exist but for the family business. “Usually what I find is that as long as mom and dad are around there can be harmony, but when they’re gone so is the glue and those differences can get very, very difficult. Everyone reacts personally.”
He offers the following advice for various scenarios:
For parents not wanting to leave:
Parents often assume they know what their kids want but after a hard one-on-one discussion, they may be very surprised. “Talk to them. Don’t assume that any one child may or may not be interested in the business,” Smith advises.
For mid-sized family businesses facing major competition:
Finding the time and resources to train the next generation can be difficult, but successful businesses emphasize education and find ways to properly train or have others train the family members in waiting. Industry leaders or trade groups may offer training, as well.
If selling is an option:
There are many reasons to sell a family business. Senior ownership may not have the resources or the finances to take the company to the next level. Maybe there’s no family member in line or none showing interest, or the next generation lacks skills the parents would like. “If that’s the case, everyone’s probably happier to let go. At least the parents get the sale proceeds and nobody’s forced to do something they weren’t cut out to do,” Smith says.
Following, several family businesses share their stories.