Only a third of family owned businesses successfully make the transition to a second generation, according to Michael Evans, national managing director of the Newport Board Group, a nationwide business strategy advisory firm.
By the third generation, 95 percent of family businesses are under new ownership, Evans said. This means that owners of family businesses, if they are truly serious about their businesses staying in the family, cannot begin soon enough to establish a succession plan. They must make sure it is as airtight as possible, he said.
Sometimes the negatives in a family business doom a family succession plan at the start, according to Evans. The next generation may not be interested in the family business—or capable of taking it over—or family disagreements can cripple attempts to maintain the business.
“You need to run the business as a business first, with appropriate family participation,” he said. “But there are examples both ways. Bill Ford still leads Ford, while Warren Buffett took over Heinz.”
A well-run family business enjoys advantages that other businesses do not, Evans said. It earns tremendous market advantages through the goodwill of customers, communities and employees, and it can establish a significant presence in industry segments across the U.S. economy.
But many family businesses also have issues, cultures and traditions that complicate the issue of succession, he said. To ensure a smooth succession, family businesses must balance family and business values, with succession plans that take into consideration the overlapping roles and responsibilities of family members.
In a recent presentation, Evans and his colleague Caleb White emphasized the need for family businesses to have well-functioning governance structures.
Family companies, according to Evans and White, must get consensus on the values, mission and long-term vision of the business, and communicate them to family and non-family stakeholders. The governance structure must stress keeping family members—especially those who aren't executives—informed about the business' major accomplishments, challenges and options.
Any rules or decisions that affect family members' employment, dividends and other benefits also must be communicated, they said.
The governance structure must contain guidelines for electing family members to the company board of directors; for helping family members gain educational and professional training; and to help resolve conflicts between family members within a defined scope, Evans and White said.
The governance structure also should build family consensus on fundamental issues, they said, such as:
• Principles for the best short- and long-term outcome for the business, the family and other stakeholders;
• Prospects for the business, including its viability in the market and its capital needs;
• The role of the family in company ownership and management, including the next generation;
• Whether to bring in management from outside the family; and
• How to grow the company while serving family interests.
Once the governance structure is established, family business owners must start the formal succession plan as early as possible, according to Evans and White. Plans to identify the company's next CEO should begin as soon as a new CEO is appointed, they said.
Business owners should seek objective advice from independent directors or non-family executives, and involve key stakeholders in the selection process, Evans and White said. They also should develop a clear transition plan between the current CEO and his successor, including the current CEO's level of involvement after he or she retires, they said.
“Succession problems are the main reason family businesses fail to reach the third generation,” they said.